An empirical decomposition of the liquidity premium in breakeven inflation rates
Mustafa Guler (),
Gürsu Keleş and
The Quarterly Review of Economics and Finance, 2017, vol. 63, issue C, 185-192
In this paper, we propose a novel way to calculate the relative liquidity premium between the nominal and inflation-indexed government bonds. We assume that both nominal and inflation-indexed bonds contain liquidity premium. Moreover, the methodology that is used in the paper does not need survey data to extract changes in the long-run inflation expectations. Hence, we can report the changes in the long-run inflation expectations on a daily basis. We apply this methodology to the Turkish bond market data. Results of the paper indicate the existence of a relative liquidity premium that takes values between -31 basis points and 43 basis points for the period between October 2012 and November 2015. This result also shows that the inflation-indexed bonds sometimes can be more liquid than nominal bonds in Turkey.
Keywords: Breakeven inflation; Inflation expectations; Liquidity premium; Inflation risk premium; C32; E31; E43; E52; G12 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:63:y:2017:i:c:p:185-192
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