Market-Based Measurement of Expectations on Short-Term Rates in Turkey
Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey
This paper aims to serve two purposes. First, it evaluates the ability of various financial market instruments to capture market expectations on short-term rate. Second, it proposes an alternative approach to obtain estimates of term premium inherent in alternative returns. Empirical results reveal that Turkish lira (TRY) returns implied by USD/TRY forward rates dominate all other return types for predicting the overnight interbank repo rate, followed by TRY interbank bid rate. Moreover, these return types are found to contain the lowest and least volatile term premium. However, forecasting ability of returns declines significantly with the introduction of the new policy framework by the Central Bank of Turkey, which utilizes ï¿½controlled degree of uncertaintyï¿½ in o/n rates as an additional tool. In the recent period TRY interbank bid and ask rates stand out as returns with the highest ability to represent market expectations.
Keywords: Monetary policy; expectations on short-term rate; market-based measures of expectations; term premium (search for similar items in EconPapers)
JEL-codes: E43 E52 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1305
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