2021, Mehmet Fatih Ekinci, Turalay Kenc

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.

2001, William Perraudin, Paolo Vitale, Turalay Kenc

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.

2007, Sel Dibooglu, Turalay Kenc

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.

2024, Tomas E. Caravello, John Driffill, Martin Sola, Turalay Kenc

We develop and estimate a consumption-based asset pricing model that uses historical US financial data and assumes recursive utility, allowing for priced regime-switching risk and intrinsic bubbles. We also estimate several restricted versions, including only a subset of these features. Priced regime-switching risk is essential to the equity risk premium, explaining more than fifty per cent of it. Furthermore, a model that does not consider regime switching would overestimate the public's risk aversion, mistakenly assigning the observed risk premium to high-risk aversion instead of priced regime-switching. We also find that intrinsic bubbles are statistically significant, and even though they are not crucial in explaining the risk premium, they substantially improve the model's fit at the end of the sample.

2013, Turalay Kenc

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.

2005, Aydin Ozkan, F. Gulcin Ozkan, Turalay Kenc

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.

2021, Emrah Ismail Cevik, Sel Dibooglu, Turalay Kenc

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.

2025, Emrah Ismail Cevik, John W. Goodell, Samet Gunay, Turalay Kenc

We develop a systemic risk indicator approach using a structural GARCH option-based default risk framework incorporating volatility clustering, variance risk premiums, along with distance-to-capital features. We apply our model to the U.S. banking sector, testing its explanatory and forecasting power. Our model successfully identifies the most systemically risky banks during heightened systemic-risk episodes. Comparing our results to related approaches, especially the respected indicator of the Federal Reserve Bank of Cleveland, we evidence markedly improved performance. Given the recent implosion of Silicon Valley Bank, exploring new approaches to constructing banking systemic risk indicators should be of great interest to regulators and policy makers.

2021, Turalay Kenc

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.

2001, Serdar Sayan, Turalay Kenc

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.

2024, Emrah Ismail Cevik, Turalay Kenc

This study investigates the economic growth implications of ongoing and prospective rises in corporate tax rates following G20 countries' minimum corporation tax agreement. We use a panel data estimation approach to examine economic growth rates and associated macro-economic variables of 42 nations from 1990 to 2017. To elicit more comprehensive insights, we make a distinction between advanced countries (ACs) and emerging market economies (EMEs) and different levels of growth using a quantile estimation approach. The results reveal that corporate tax rate rises depress growth, with a relatively sizeable impact for EMEs, whereas it is not statistically significant for ACs. At high quantiles of growth rates, the impact of the corporate tax policy on growth increases. These findings suggest a dual effect for EMEs with relatively high growth rates and symmetric growth effects of corporate tax changes, necessitating innovative policy prescriptions to address the negative growth impact of prospective higher corporate tax rates.