Effects of US interest rates and news on the daily interest rates of a highly indebted emerging economy: evidence from Turkey

Abstract

It has been widely demonstrated that asset prices react sensitively to macroeconomic news releases both in the industrialized countries and emerging markets. However, there are contradicting results on the effects of changes in interest rates of industrialized countries on asset prices of emerging markets. In heavily indebted economies, in addition to these factors, political news and announcements from international institutions that may increase or decrease concerns about debt sustainability can affect asset prices as well. This potential notwithstanding, there has been relatively limited empirical work on the effects of such variables. The objective of this study is to quantify the impact of all of these factors on interest rates of a highly indebted emerging economy. Using daily post-crisis data of the Turkish economy we show that both good and bad political news, International Monetary Fund announcements, and European Union related news significantly affected secondary market government securities yields, whereas volatility of yields was affected mainly by bad news releases. Changes in US Treasury bond rates and 'appetite' for risk of foreign investors did not affect government securities yields in the period analysed.