Exploring the Nexus Between Short- and Long-Run Rate of Interests in Turkey’s Bond Market
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Abstract
This research analyzes the correlation between long- and short-term rate of interests in Turkey's government bond market, assessing the evidence in support of the Market Segmentation Theory (MST) and Expectations Hypothesis (EH). The research implements linear and nonlinear autoregressive distributed lag (ARDL and NARDL, respectively) approaches to address linearity, asymmetric effects, and structural breaks. The results indicate that short-term rate of interests have a substantial impact on mid-term (two-year and five-year) bond rates, backing the EH, while long-term (ten-year) rates conform to the MST and suggest the presence of segmented markets. Inflation, as measured by the Consumer Price Index, demonstrates a pronounced Fisher effect across various maturities, characterized by asymmetric responses to both positive and negative shocks. The error correction terms indicate that mid-term rates exhibit rapid adjustment, whereas long-term rates adjust more slowly. The findings of the Granger causality test provide further confirmation of the dynamic interactions by showing that changes in short-term interest rates and inflation have predictive power over the long-term rate of interests.
JEL Codes: E40, E43, B22, C32
Keywords: Rate of interest; Term structure; Government bonds; Expectations Theory; Market Segmentation Theory
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Tuncer, A. and İvrendi, M. (2025) “Exploring the Nexus Between Short- and Long-Run Rate of Interests in Turkey’s Bond Market”, World Journal of Applied Economics, 11(1), pp. 39-62. doi: 10.22440/wjae.11.1.3.
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References
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Bahmani-Oskooee, M., & Fariditavana, H. (2016). Nonlinear ARDL approach and the Jcurve phenomenon. Open Economies Review, 27 , 51-70. doi:10.1007/s11079-015-9369-5
Bahmani-Oskooee, M., & Saha, S. (2019). On the effects of policy uncertainty on stock prices: an asymmetric analysis. Quantitative Finance and Economics, 3 (2), 412-424. doi:10.3934/QFE.2019.2.412
Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18 (1), 1-22. doi:10.1002/jae.659
Carrieroa, A., Faveroa, C., & Kaminska, I. (2006). Financial factors, macroeconomic information and the Expectations Theory of the term structure of rate of interests. Journal of Econometrics, 131 (1-2), 339-358. doi:10.1016/j.jeconom.2005.01.019
Culbertson, J. (1957). The Term Structure of Rate of interests. Quarterly Journal of Economics, 71 (4), 485-517. doi:10.2307/1885708
Egert, B., & MacDonald, R. (2009). Monetary transmission mechanism in Central and Eastern Europe: Surveying the surveyable. Journal of Economic Surveys, 23 (2), 277-327. doi:10.1111/j.1467-6419.2008.00563.x
Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica, 55 (2), 251-276. doi:10.2307/1913236
Eroglu, B. A., & Yildirim Karaman, S. (2018). Responses of the term structure of rate of interests and asset prices to monetary policy shocks: Evidence from Turkey. METU Studies in Development, 45 , 117-158.
Estrella, A., & Mishkin, F. S. (1996). The Yield Curve as a Predictor of U.S. Recessions. Current Issues in Economics and Finance, 2 (7). https://www.newyorkfed.org/medialibrary/media/research/current issues/ci2-7.pdf.
Fisher, R. A. (1930). Moments and product moments of sampling distributions. Proceedings of the London Mathematical Society, s2-30 (1), 199-238. doi:10.1112/plms/s2-30.1.199
Guidolin, M., & Thornton, D. (2018). Predictions Of Short-Term Rates And The Expectations Hypothesis. International Journal of Forecasting, 34 (4), 636-664. doi:10.1016/j.ijforecast.2018.03.006
Hadi, A., Zauniddin, Z., Hussain, H., & Rehan, R. (2019). Interactions Of long-and shortterm Rate of interests In Malaysian Debt Markets: Application Of Error Correction Model And Wavelet Analysis. Asian Academy of Management Journal, 24 (1), 19–31. doi:10.21315/aamj2019.24.s1.2
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Koop, G. (2013). Analysis of economic data. John Wiley & Sons.
Kose, N., Emirmahmutoglu, F., & Aksoy, S. (2012). The rate of interest–inflation relationship under an inflation targeting regime: The case of Turkey. Journal of Asian Economics, 23 (4), 476-485. doi:10.1016/j.asieco.2012.03.001
Kutlar, A., & Sarıkaya, M. (2003). Asimetrik enformasyon ve marjinal maliyet fiyatlama modeli cercevesinde Turkiye'de kredi tayinlamasi ve faiz oranlarinin tahmini. Cumhuriyet Universitesi Iktisadi ve Idari Bilimler Dergisi , 4 (1), 1-18.
Mankiw, N. G., & Summers, L. H. (1984). Do long-term rate of interests overreact to short-term rate of interests? (Working Paper, No. w1345). National Bureau of Economic Research (NBER). https://www.nber.org/system/files/working_papers/w1345/w1345.pdf.
Mehra, Y. P. (1996). Monetary policy and long-term rate of interests. Federal Reserve Bank Richmond Economic Quarterly, 82 (3), 27-49. https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic quarterly/1996/summer/pdf/mehra.pdf.
Mishkin, F. S. (2016). The economics of money, banking, and financial markets. Pearson Education.
Mustafa, M., & Rahman, M. (1995). Cointegration between US long-and short-term rate of interests (both nominal and real). Applied Financial Economics, 5 (5), 323-327. doi:10.1080/758522759
Ozdemir, K. A., & Ozel, O. (2012). Regime changes in monetary policy and the Expectation Hypothesis of the term structure in Turkey. Journal of Business Economics and Management, 13 (2), 261-274. doi:10.3846/16111699.2011.620146
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16 (3), 289-326. doi:10.1002/jae.616
Sarac, T. B., & Ucan, O. (2013). The rate of interest channel in Turkey: an investigation with Kalman filter approach. International Journal of Economics and Financial Issues, 3 (4), 874-884.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In R. Sickles & W. Horrace (Eds.), Festschrift in Honor of Peter Schmidt (p. 281-314). Springer, New York, NY. doi:10.1007/978-1-4899-8008-3_9
Shrestha, K., & Tan, K. H. (2005). Real rate of interest parity: long-run and short-run analysis using wavelets. Review of Quantitative Finance and Accounting, 25 (2), 139-157. doi:10.1007/s11156-005-4246-8
Sunal, O. (2020). The Behaviour of Rate of interests in Turkiye. Fiscaoeconomia, 4 (1), 203-215. doi:10.25295/fsecon.2020.01.011
Taylor, C. (1993). To follow a rule. In M. Postone, E. Lipuma, & C. Calhoun (Eds.), Bourdieu: Critical Perspectives (p. 45-60). Wiley.
Thornton, D. L. (2012). Greenspan’s conundrum and the Fed’s ability to affect long-term yields (Working Paper, No. 2012-036A). Federal Reserve Bank of St. Louis. https://files.stlouisfed.org/files/htdocs/wp/2012/2012-036.pdf.
Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66 (1-2), 225-250. doi:10.1016/0304-4076(94)01616-8
Weber, E., & Wolters, J. (2013). Risk and policy shocks on the US term structure. Scottish Journal of Political Economy, 60 (1), 101-119. doi:10.1111/sjpe.12004
Aklan, N., & Nargele¸cekenler, M. (2008). Monetary Policy Rate of interest Decisions and Long-Term Rate of interest Relationship. Marmara University, Journal of Economics and Administrative Sciences, 25 (2), 141-163.
Akram, T., & Mamun, K. (2023). An analysis of UK swap yields. Journal of Post Keynesian Economics, 46 (4), 566-586. doi:10.1080/01603477.2023.2242348
Akram, T., & Uddin, S. A. H. (2021). An empirical analysis of long-term Brazilian rate of interests. PLoS ONE, 16 (9), e0257313. doi:10.1371/journal.pone.0257313
Arize, A. C., Malindretos, J., & Obi, Z. I. (2002). Long- and Short-Term Rate of interests in 19 Countries: Tests of Cointegration and Parameter Instability. Atlantic Economic Journal, 30 , 105-120. doi:10.1007/BF02299156
Arslan, M. (2012). Faiz Oranlarinin Vade Yapisi, Beklenti Hipotezinin Turk Sabit Getirili Menkul Kiymet Piyasasinda Test Edilmesi. Isletme Arastirmalari Dergisi , 4 (3), 5-19.
Bahmani-Oskooee, M., & Fariditavana, H. (2016). Nonlinear ARDL approach and the Jcurve phenomenon. Open Economies Review, 27 , 51-70. doi:10.1007/s11079-015-9369-5
Bahmani-Oskooee, M., & Saha, S. (2019). On the effects of policy uncertainty on stock prices: an asymmetric analysis. Quantitative Finance and Economics, 3 (2), 412-424. doi:10.3934/QFE.2019.2.412
Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18 (1), 1-22. doi:10.1002/jae.659
Carrieroa, A., Faveroa, C., & Kaminska, I. (2006). Financial factors, macroeconomic information and the Expectations Theory of the term structure of rate of interests. Journal of Econometrics, 131 (1-2), 339-358. doi:10.1016/j.jeconom.2005.01.019
Culbertson, J. (1957). The Term Structure of Rate of interests. Quarterly Journal of Economics, 71 (4), 485-517. doi:10.2307/1885708
Egert, B., & MacDonald, R. (2009). Monetary transmission mechanism in Central and Eastern Europe: Surveying the surveyable. Journal of Economic Surveys, 23 (2), 277-327. doi:10.1111/j.1467-6419.2008.00563.x
Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica, 55 (2), 251-276. doi:10.2307/1913236
Eroglu, B. A., & Yildirim Karaman, S. (2018). Responses of the term structure of rate of interests and asset prices to monetary policy shocks: Evidence from Turkey. METU Studies in Development, 45 , 117-158.
Estrella, A., & Mishkin, F. S. (1996). The Yield Curve as a Predictor of U.S. Recessions. Current Issues in Economics and Finance, 2 (7). https://www.newyorkfed.org/medialibrary/media/research/current issues/ci2-7.pdf.
Fisher, R. A. (1930). Moments and product moments of sampling distributions. Proceedings of the London Mathematical Society, s2-30 (1), 199-238. doi:10.1112/plms/s2-30.1.199
Guidolin, M., & Thornton, D. (2018). Predictions Of Short-Term Rates And The Expectations Hypothesis. International Journal of Forecasting, 34 (4), 636-664. doi:10.1016/j.ijforecast.2018.03.006
Hadi, A., Zauniddin, Z., Hussain, H., & Rehan, R. (2019). Interactions Of long-and shortterm Rate of interests In Malaysian Debt Markets: Application Of Error Correction Model And Wavelet Analysis. Asian Academy of Management Journal, 24 (1), 19–31. doi:10.21315/aamj2019.24.s1.2
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52 (2), 169-210. doi:10.1111/j.1468-0084.1990.mp52002003.x
Kagraoka, Y., & Moussa, Z. (2013). Quantitative easing, credibility and the time-varying dynamics of the term structure of rate of interest in Japan. Journal of International Financial Markets, Institutions and Money, 25 (1), 181–201. doi:10.1016/j.intfin.2013.03.002
Koop, G. (2013). Analysis of economic data. John Wiley & Sons.
Kose, N., Emirmahmutoglu, F., & Aksoy, S. (2012). The rate of interest–inflation relationship under an inflation targeting regime: The case of Turkey. Journal of Asian Economics, 23 (4), 476-485. doi:10.1016/j.asieco.2012.03.001
Kutlar, A., & Sarıkaya, M. (2003). Asimetrik enformasyon ve marjinal maliyet fiyatlama modeli cercevesinde Turkiye'de kredi tayinlamasi ve faiz oranlarinin tahmini. Cumhuriyet Universitesi Iktisadi ve Idari Bilimler Dergisi , 4 (1), 1-18.
Mankiw, N. G., & Summers, L. H. (1984). Do long-term rate of interests overreact to short-term rate of interests? (Working Paper, No. w1345). National Bureau of Economic Research (NBER). https://www.nber.org/system/files/working_papers/w1345/w1345.pdf.
Mehra, Y. P. (1996). Monetary policy and long-term rate of interests. Federal Reserve Bank Richmond Economic Quarterly, 82 (3), 27-49. https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic quarterly/1996/summer/pdf/mehra.pdf.
Mishkin, F. S. (2016). The economics of money, banking, and financial markets. Pearson Education.
Mustafa, M., & Rahman, M. (1995). Cointegration between US long-and short-term rate of interests (both nominal and real). Applied Financial Economics, 5 (5), 323-327. doi:10.1080/758522759
Ozdemir, K. A., & Ozel, O. (2012). Regime changes in monetary policy and the Expectation Hypothesis of the term structure in Turkey. Journal of Business Economics and Management, 13 (2), 261-274. doi:10.3846/16111699.2011.620146
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16 (3), 289-326. doi:10.1002/jae.616
Sarac, T. B., & Ucan, O. (2013). The rate of interest channel in Turkey: an investigation with Kalman filter approach. International Journal of Economics and Financial Issues, 3 (4), 874-884.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In R. Sickles & W. Horrace (Eds.), Festschrift in Honor of Peter Schmidt (p. 281-314). Springer, New York, NY. doi:10.1007/978-1-4899-8008-3_9
Shrestha, K., & Tan, K. H. (2005). Real rate of interest parity: long-run and short-run analysis using wavelets. Review of Quantitative Finance and Accounting, 25 (2), 139-157. doi:10.1007/s11156-005-4246-8
Sunal, O. (2020). The Behaviour of Rate of interests in Turkiye. Fiscaoeconomia, 4 (1), 203-215. doi:10.25295/fsecon.2020.01.011
Taylor, C. (1993). To follow a rule. In M. Postone, E. Lipuma, & C. Calhoun (Eds.), Bourdieu: Critical Perspectives (p. 45-60). Wiley.
Thornton, D. L. (2012). Greenspan’s conundrum and the Fed’s ability to affect long-term yields (Working Paper, No. 2012-036A). Federal Reserve Bank of St. Louis. https://files.stlouisfed.org/files/htdocs/wp/2012/2012-036.pdf.
Toda, H. Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66 (1-2), 225-250. doi:10.1016/0304-4076(94)01616-8
Weber, E., & Wolters, J. (2013). Risk and policy shocks on the US term structure. Scottish Journal of Political Economy, 60 (1), 101-119. doi:10.1111/sjpe.12004