Decomposition of risk premia in equity markets through time

This thesis contains the documentation of the time varying risk premia for Turkish equity market denominated in local currency, using two sophisticated asset pricing methods. In the first part, we choose a dynamic panel method that uses cross sectional and time series information simultaneously to infer the path of risk premia (Gagliardini, Ossola and Scaillet, 2016). Using this method, we asses the explanatory power of several conditioning information, and document time varying factor premiums in Turkey. In the second part, we use instrumental variables method to avoid errors in variable problem while using individual stocks as test assets (Jegadeesh, Noh, Pukthuanthong, Roll and Wang, 2019). With this method, we test several equity premium models whether they are valid under time varying settings. Therefore, our contribution to the literature can be summarized in three key points. (1) Documenting time varying risk premia in an emerging market like Turkey for different factors. (2) Extending the conditioning information set beyond the ones existing in the literature to include variables that are specifically important for an emerging market like Turkey. Such factors include but not limited to exchange rate, commodity prices, dividend yield etc. (3) Laying the groundwork to extend the study to international markets to assess the differences across dynamics of time varying risk premia denominated in local currencies, which should yield more information than the limited existing studies done with dollar denominated returns.