Market-Based Measurement of Expectations on Short-Term Rates in Turkey

Market-Based Measurement of Expectations on Short-Term Rates in Turkey

Title : Market-Based Measurement of Expectations on Short-Term Rates in Turkey
Number : 13/05
Author(s) : İbrahim Burak Kanlı
Language : English
Date : February 2013
Abstract : 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 “controlled degree of uncertainty” 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, Epectations on short-term rate, Market-based measures of expectations, Term premium
JEL Codes : E43; E52; G12

 

Market-Based Measurement of Expectations on Short-Term Rates in Turkey
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