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Investigating Regime-Dependent Dynamics in Country Risk Premium: Evidence from Turkey and Emerging Markets

Mustafa Akay, Berat Bayram, Abdullah Kazdal () and Muhammed Hasan Yilmaz

CBT Research Notes in Economics from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: [EN] Timely analysis of country risk premium through the use of high-frequency proxies is essential for monitoring developments regarding financial stability. This study attempts to identify and characterize different regime structures displayed by the country risk premium by using alternative high-frequency proxies such as credit default swap (CDS) and JP Morgan Emerging Market Bond Index Global (EMBIG) spread. In doing so, the study adopts a Markov-switching dynamic regression model to analyze the dynamics of risk premium by taking into account the associated asymmetries in level, volatility, persistence and sensitivity to global risk factors in both the Turkish case and the emerging markets context. Estimation results show that excessive regime has higher level and volatility but lower persistence. Furthermore, the correlation between the probability of experiencing excessive regime in Turkey and in emerging economies is quite high, which implies the existence of a common driver in shaping the regime formation for risk premium. Yet, it is found that the probability of experiencing excessive regime for Turkey has recently been higher than peer emerging market countries due to country-specific shocks. Moreover, the approach employed in this study to predict and assess the course of risk premia can also be used for monitoring and forecasting purposes. [TR] Ulke risk priminin yuksek frekansli veriler araciligiyla zamanli analiz edilmesi finansal istikrara iliskin gelismelerin takibi acisindan onem tasimaktadir. Bu calismada, kredi temerrut takasi (CDS) primi ve JP Morgan Gelismekte olan Ulkeler Kuresel Tahvil Endeksi (EMBIG) gibi yuksek frekansli alternatif gostergelerle risk primi icin iki rejim (ilimli ve asiri) tanimlanmakta ve karakterize edilmektedir. Bu amaca yonelik olarak, calismada Markov rejim degisimi dinamik regresyon modeliyle risk priminin dinamikleri seviye, oynaklik, atalet ve kuresel risk faktorune duyarlilik acisindan olasi asimetrileri de dikkate alarak Turkiye ve gelismekte olan ulkeler ozelinde incelenmektedir. Tahmin sonuclari asiri hareketleri iceren rejimin seviye ve oynakliginin yuksek, ataletinin ise dusuk oldugunu gostermektedir. Ayrica, sonuclar, Turkiye ve gelismekte olan ulkelerin risk primi acisindan asiri rejimde olma olasiliklarinin oldukca yuksek bir korelasyona sahip oldugunu gostermekte, bu durum da risk primi rejiminin olusumunda ortak surukleyicinin varligina isaret etmektedir. Ote yandan, son donemlerde yasanan ulkeye ozgu soklar nedeniyle Turkiye'nin asiri rejimde olma olasiliginin benzer gelismekte olan ulkelerden daha yuksek oldugu bulunmustur. Ek olarak, bu calismada risk priminin seyrinin degerlendirilmesi ve tahmin edilmesinde basvurulan yontemin konjonktur takibi ve ongorusu amacina yonelik olarak da kullanilabilecegi dusunulmektedir.

Date: 2020
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