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- PublicationCorporate bankruptcies and official bail-outs: a cost-benefit analysisAydin Ozkan; F. Gulcin Ozkan; Turalay Kenc (Elsevier B.V., 2005)
The existence of government guarantees to bail out investors and the use of official support to prevent corporate bankruptcies are commonly viewed to have largely contributed to the financial fragilities of many emerging market economies during the 1990s. This paper attempts to rationalize the existence and the duration of such policies. By using a simple model of the economy, we formalize governments' decision on how long to provide resources to bridge the gap between the corporate sector's earnings and obligations. By considering both the costs and benefits of bail-outs in an environment where there are unfavorable productivity shocks, we show that the bail-out policy ends sooner; the higher the initial level of foreign borrowing, the lower the productivity, the lower the rate of time preference, and the higher the world interest rate. We also show that given any set of fundamentals, an unfavorable shift in market sentiments may end such policies sooner than otherwise.
- PublicationBank default indicators with volatility clusteringEmrah Ismail Cevik; Sel Dibooglu; Turalay Kenc (Springer-Verlag GmbH, 2021)
We estimate default measures for US banks using a model capable of handling volatility clustering like those observed during the Global Financial Crisis (GFC). In order to account for the time variation in volatility, we adapted a GARCH option pricing model which extends the seminal structural approach of default by Merton (J Finance 29(2):449, 1974) and calculated "distance to default" indicators that respond to heightened market developments.With its richer volatility dynamics, our results better reflect higher expected default probabilities precipitated by the GFC. The diagnostics show that the model generally outperforms standard models of default and offers relatively good indicators in assessing bank failures.
- PublicationDemographic shock transmission from large to small countries: an overlapping generations CGE analysisSerdar Sayan; Turalay Kenc (Elsevier Science Inc., 2001)
International commodity and capital flows provide channels for the transmission of the effects of demographic changes in large countries onto small open economies by altering the prices and interest rates facing them. This implies that even small countries with relatively young populations are potentially vulnerable to the effects of population aging in large industrial economies. To address this issue, which has largely been overlooked in previous literature, this paper considers the case of European Union and Turkey and shows, within an overlapping generations general equilibrium framework, that spillovers of the demographic shock in Europe would intensify the changes that Turkey would experience during its own demographic transition.
- PublicationThe spirit of capitalism, asset pricing and growth in a small open economySel Dibooglu; Turalay Kenc (Elsevier B.V., 2007)
Conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics. This may be due to preference specifications in conventional models. In this paper, we consider preferences with the "spirit of capitalism" (the desire to accumulate wealth as a way of acquiring status). We analyze a number of potential effects of international catching-up and the spirit of capitalism on savings, growth, portfolio allocation and asset pricing. Moreover, we obtain a multi-factor Capital Asset Pricing Model (CAPM). Our results show that status concerns have non-trivial effects on savings, growth, portfolio allocation, asset prices and the foreign exchange risk premium.
- PublicationInflation and sovereign defaultWilliam Perraudin; Paolo Vitale; Turalay Kenc (Palgrave Macmillan Journals, 2001)
Recent research has highlighted the role that the government budget constraint plays in determining the consumer price level. According to the fiscal approach to price determination, prices adjust so that the discounted value of future real government primary surpluses equals the current real value of public debt. An important implication is that the probability of a crisis involving default on public debt may directly affect consumer prices. This paper examines the interaction of prices and sovereign insolvency crises using simple, continuous-time models of the government budget constraint.
- PublicationMeasuring financial stress in TurkeyTuralay Kenc (Elsevier Inc, 2013)
This study examines episodes of financial stress and develops a financial stress index for the Turkish economy for the 1997-2010 period. We consider various variables that summarize different aspects of financial conditions in the economy to gauge financial stress. We construct the index and show that financial stress affects economic activity significantly. Specifically, the index is a leading indicator of economic activity in Turkey. We then discuss how information provided by the financial stress index can be used to fine tune macroeconomic policy.
- PublicationBusiness cycles and energy real options valuationMehmet Fatih Ekinci; Turalay Kenc (Springer, 2021)
Energy projects are mostly large, irreversible and highly risky investments. The real options valuation approach is widely used to value such investment projects. Indeed, papers covered in the survey article by Fernandes et al. (2011) underscore the relevance of the real options approach to value energy sector investments. However, the related literature overlooks the distributional nature of project cash flows. The work on energy real options overwhelmingly considers log-normally-distributed cash flows, despite the well-documented evidence that cash flows are normally distributed (Burg, 2018; Kanniainen, 2009; Veronesi, 1999). The log-normality cash flows assumption solves the tractability of the problem at expense of ruling out negative cash flows. In other words, the popularity of this assumption stems from its tractability rather than its realism. Given the large and irreversible nature of energy projects, distributional assumptions characterising cash flows are crucially important in these investments. Furthermore, the interaction of normally distributed cash flows with macroeconomic risk associated with business cycles can be different than that of log-normal cash flows. This paper therefore uses a real options approach to value energy projects whose cash flows follow a normal distribution and subject to macroeconomic risk.
- PublicationEstimating volatility clustering and variance risk premium effects on bank default indicatorsTuralay Kenc (Springer Science+Business Media, 2021)
Default risk increases substantially during financial stress times due to mainly the two reasons: volatility clustering and investors' desire to protect themselves from such increases in volatility. It manifested in the aftermath of the Global Financial Crisis of 2008-2009 with unpleasant outcomes of many bankruptcies and severe financial distress. To account for these features, we adapted the structural credit risk approach to include both time-varying (return) volatility and risk premium about the return volatility itself. By applying the model to US banks, we obtain better bank default indicators in comparison to the benchmark models.
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