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					                Risk Aversion, Sovereign Bonds and Risk Premium

                                           Ferhan Salman
                              Research and Monetary Policy Department
                                     The Central Bank of Turkey
                          Istiklal Cad. No: 10, 06100 Ulus, Ankara Turkey


This paper analyzes the risk premium associated with sovereign bonds. We use the Generalized Method
of Moments to estimate the level of risk aversion that is implied by the demand for such bonds. We
show that although sovereign bonds offer comparable returns to those of US Equities they command
higher risk premiums. Second, we observe that in contrast to what is suggested by theory, risk aversion
parameters differ for each country. We name this observation “The Sovereign Bond Premium Puzzle.”
Moreover, we present that, as oppose to ones intuition, country fundamentals and default probability
are not answers for this variation.