Bond Premium in Turkey : Inflation Risk or Default Risk?

In this paper we examine the difference between T-bill returns and common stock returns in Turkey. We observe that there is a bond premium in Turkey unlike the equity premia in developed countries. As an attempt to explain this surprising observation, we incorporate inflation risk and default risk t...

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Bibliographic Details
Published in:Emerging markets finance & trade 2005-03, Vol.41 (2), p.25-40
Main Authors: BASÇI, ERDEM, EKINCI, MEHMET FATIH
Format: Article
Language:English
Subjects:
Arithmetic mean
asset pricing
bond premium
Common stock
Consumption
Credit risk
Default
default risk
Emerging markets
Equity
equity-premium puzzle
Inflation
Inflation risk
Rates of return
Risk assessment
Risk aversion
Risk premiums
Stock market indices
Studies
Trade finance
Treasury bills
United States Treasury bills
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Summary:In this paper we examine the difference between T-bill returns and common stock returns in Turkey. We observe that there is a bond premium in Turkey unlike the equity premia in developed countries. As an attempt to explain this surprising observation, we incorporate inflation risk and default risk to the Mehra and Presscott (1985) dynamic asset-pricing model. Calibration with reasonable parameter values indicates that the inflation risk alone is not sufficient to explain the observed bond premium. However, by allowing for the presence of a perceived default probability, we can explain the observed bond premium on Turkish T-bills over Turkish common stocks.
ISSN:1540-496X
1558-0938
DOI:10.1080/1540496X.2005.11052602