Term premium in Turkish lira interest rates : the role of foreign investors’ share

In this paper we decompose Turkish Lira interest rates into expected short rate and term premium components, using two well-established methods. Then we focus on the impact of the share of foreign investors on bond yields by instrumenting that share with VIX and Merry Lynch option volatility estimate (Move) indices while controlling for other macroeconomic determinants of term premium. We find that a one-percentage-point increase in the foreign investors’ share in the bond market reduces the 5-year term premium by 55 basis points, which could be attributed to the impact of yield-seeking foreign investors in emerging markets.