Country Risk Premium: The Case of Chile

Currently there is no agreed method to estimate the Risk Premium accurately, therefore, different authors arrive at significantly different results when calculating the risk premium for a given country or industry. This work estimates the risk premium of the Chilean stock market (PRM) for the period 1993-2020 using different estimation methodologies (Differential Returns, Implicit Return in Current Stock Prices). The results indicate, depending on the methodology used, a Premium for Risk that ranges between 1,91% and 10,28%, which shows the existence of a positive premium for assuming risk in Chile that ranges around 5,3%.

Country Risk Premium: The Case of Chile

Currently there is no agreed method to estimate the Risk Premium accurately, therefore, different authors arrive at significantly different results when calculating the risk premium for a given country or industry. This work estimates the risk premium of the Chilean stock market (PRM) for the period 1993-2020 using different estimation methodologies (Differential Returns, Implicit Return in Current Stock Prices). The results indicate, depending on the methodology used, a Premium for Risk that ranges between 1,91% and 10,28%, which shows the existence of a positive premium for assuming risk in Chile that ranges around 5,3%.

Jacks of All Trades and Masters of One: Declining Search Frictions and Unequal Growth

Declining search frictions generate productivity growth by allowing workers to find jobs for which they are better suited. For “jacks of all trades”—workers whose productivity is similar across different jobs in their labor market—declining search frictions lead to minimal growth. For “masters of one trade”—workers whose productivity varies a great deal across different jobs in their labor market—declining search frictions lead to fast growth. A rudimentary calibration suggests that differential returns to declining search frictions may account for a non-negligible fraction of the wage growth differential between routine and nonroutine workers. (JEL J24, J31, J63, J64, O33)

The Outperformance Probability of Mutual Funds

We propose the outperformance probability as a new performance measure, which can be used in order to compare a strategy with a specified benchmark, and develop the basic statistical properties of its maximum-likelihood estimator in a Brownian-motion framework. The given results are used to investigate the question of whether mutual funds are able to beat the S&P 500 or the Russell 1000. Most mutual funds that are taken into consideration are, in fact, able to beat the market. We argue that one should refer to differential returns when comparing a strategy with a given benchmark and not compare both the strategy and the benchmark with the money-market account. This explains why mutual funds often appear to underperform the market, but this conclusion is fallacious.