Default and equity risk premium in the conditions of globalization and the internationalisation of the biggest capital markets of the EU and GFCI countries. Ex post implied equity premium analysis

AbstractThe model of Mehra and Prescott (1985, J. Econometrics, 22, 145-161) implies that reasonable coefficients of risk-aversion of economic agents cannot explain the equity risk premium generated by financial markets. This discrepancy is hitherto regarded as a major financial puzzle. We propose an alternative model to explain the equity premium. For normally distributed returns and for returns far away from normality (but still light tailed), realistic equity risk premia do not imply puzzlingly high risk aversions. Following our approach, the ‘equity premium puzzle’ does not exist. We also consider fat-tailed return distributions and show that Pareto tails are incompatible with constant relative risk aversion.

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Equity Premium with Habits, Wealth Inequality and Background Risk

Journal of Risk and Financial Management ◽

10.3390/jrfm14070321 ◽

2021 ◽

Vol 14 (7) ◽

pp. 321

Author(s):

Christos I. Giannikos ◽

Georgios Koimisis

Keyword(s):

Asset Pricing ◽

Risk Premium ◽

Equity Premium ◽

Wealth Inequality ◽

Exchange Economy ◽

Background Risk ◽

Equity Risk Premium ◽

Income Uncertainty ◽

Equity Risk ◽

Asset Pricing Puzzles

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

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Equity risk premium: A cross country analysis on return behaviour

Ushus - Journal of Business Management ◽

10.12725/ujbm.32.4 ◽

2015 ◽

Vol 14 (3) ◽

pp. 47-57

Author(s):

Santhosh Kumar

Keyword(s):

Emerging Markets ◽

Risk Premium ◽

Central Element ◽

Global Integration ◽

Equity Risk Premium ◽

Equity Risk ◽

Ex Post ◽

Country Analysis ◽

Developed Nations ◽

The Impact

The equity risk premium has been of paramount importance in the field of finance and is still a widely utilised central element for every risk return model in corporate finance, asset pricing and other fields of economic literature. This research captures the differences in the ex-post behaviour of equity risk premium between developed and emerging markets .Further, an investigation has been made into the impact of global integration on the ERP across G7 countries and 7 emerging countries. .The analysis has shown a decline in the ERP of developed nations and an upward trend in emerging markets over the chosen sub-sample period. We found out that there exists low correlation in ERP of emerging markets in comparison with developed markets

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The historically realised equity risk premium as a guide to future expectations in an emerging market: The case of South Africa

Journal of Economic and Financial Sciences ◽

10.4102/jef.v2i1.361 ◽

2008 ◽

Vol 2 (1) ◽

pp. 89-104

Author(s):

Jesse De Beer

Keyword(s):

Risk Premium ◽

Emerging Market ◽

Equity Risk Premium ◽

Future Expectations ◽

Investment Performance ◽

Equity Risk ◽

Ex Post ◽

Long Run ◽

Ex Ante

The concept of an equity risk premium (ERP) is fundamental to modern financial theory and central to every decision at the heart of corporate finance. Efforts to quantify ERP are well rewarded by insights into the stability and dynamics of long-term investment performance. Such efforts require the quantification of both historically realised (ex post) and expected future (ex ante) premiums. Finding an appropriate proxy for the expected (ex ante) ERP remains a challenging aspect. One widely used application is the use of long-term averages of observed market premiums as a proxy for expected returns. The aim of this paper is to analyse the appropriateness of the historical methodology of estimating expected ERP in the South African context. The analysis in this paper suggests that analysing past historical figures remains useful in the SA context. This is supported by the results of the statistical analysis, showing stationarity of the ERP time-series, meaning that the true mean does not change over time. This implies that the historical average mean may be used as a proxy for the long-run expected ERP. However, the well-documented problems relating to large standard errors (predictability problem) and relevance due to changing circumstances are also evident in the SA data. Thus, investors would be well advised to analyse the past and apply informed judgments as to future differences, if any, when attempting to arrive at fair forecasts.

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The impact of monetary policy shocks on the equity risk premium before and after the Quantitative Easing in the United Kingdom

Investment Management and Financial Innovations ◽

10.21511/imfi.13(4-1).2016.01 ◽

2016 ◽

Vol 13 (4) ◽

pp. 146-159 ◽

Cited By ~ 2

Author(s):

Sunil Poshakwale ◽

Pankaj Chandorkar

Keyword(s):

Monetary Policy ◽

Risk Premium ◽

Quantitative Easing ◽

Monetary Policy Shocks ◽

Equity Risk Premium ◽

Equity Risk ◽

Ex Post ◽

Before And After ◽

Policy Shocks ◽

The Impact

The authors investigate the impact of structural monetary policy shocks on ex-post equity risk premium (ERP) of aggregate and sectoral FTSE indices and 25 Fama-French style value-weighted portfolios. They find that monetary policy shocks negatively affect the ERP but at the sectoral level, the magnitude of the response is heterogeneous. Further, monetary policy shocks have a significant negative (positive) impact on the ERP before (after) the implementation of quantitative easing (QE). The empirical evidence provided in the paper sheds light on the equity market’s asymmetric response to the BoE’s policy before and after the monetary stimulus. Keywords: monetary policy, equity risk premium, quantitative easing, monetary policy shocks, structural vector autoregression, Bank of England, Taylor monetary policy rule, unconventional monetary policy, output gap, inflation gap, Okun’s law. JEL Classification: E5, E30, G0, G1

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WOULD THERE EVER BE CONSENSUS VALUE AND SOURCE OF THE EQUITY RISK PREMIUM? A REVIEW OF THE EXTANT LITERATURE

International Journal of Theoretical and Applied Finance ◽

10.1142/s021902490600355x ◽

2006 ◽

Vol 09 (02) ◽

pp. 199-215

Author(s):

OLUWATOBI OYEFESO

Keyword(s):

Risk Premium ◽

Equity Premium ◽

Unresolved Issue ◽

Equity Risk Premium ◽

Equity Premium Puzzle ◽

Market Risk Premium ◽

Consensus Value ◽

Equity Risk ◽

Premium Puzzle ◽

The Relationship

This paper reviews the extant studies on the equity premium. While paper attempts to make the review comprehensive, describing all of the work in this area is difficult considering the numerous researches that have been done in this area. Essentially, the paper assesses the relationship between the excess return and the equity risk premium and draws attention to their interchangeable use in the finance literature. Existing literature is reviewed around possible theories explaining the equity premium puzzle and followed by the empirical evidence on the theories. Finally, this paper focuses on the problems of attaining consensus value and source of the market risk premium, which makes equity premium puzzle an unresolved issue among the academics and finance practitioners.

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