The Equity Risk Premium Amid a Global Financial Crisis

This paper aims to mainly investigate equity risk premium of the six major members of ASEAN countries such as Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam which have been chosen based on their stock market development and data availability. It has focused on the two main issues of the equity risk premium such as the intriguing issue on the existence of equity premium puzzle and the analysis on the impact of the 2008 financial crisis on the trend of the equity risk premium and their potential contribution on the risk aversion's attitude of the ASEAN investors. Three methods are utilized to test this phenomenon (1) basic model consumption of Mehra and Prescott (1985) and simplified model by Ni (2006); (2) calibration (Campbell, 2003) and (3) GMM estimation (Hansen, 1982). The calibration method results suggest that the puzzle exists in Indonesia.It has determined that the puzzle seems lying on the negative covariance between the consumption growth rate and the average real stock return. After applying GMM as method of the three sub-sample analyses for before, after and excluding 2008, it shows that financial crisis didn't affect much the value of risk aversion, but it cannot deny the fact that it has profound effect on the behavior of the equity risk premium. It can also be inferred that after crisis, ASEAN investors are likely tend to become more decreasing relative risk averse and prefer to have happiness tomorrow than today.

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Determinants of the implied equity risk premium in Brazil

Brazilian Review of Finance ◽

10.12660/rbfin.v18n1.2020.80038 ◽

2020 ◽

Vol 18 (1) ◽

pp. 68

Author(s):

Antonio Zoratto Sanvicente ◽

Mauricio Rocha Carvalho

Keyword(s):

Risk Premium ◽

Stock Prices ◽

Global Financial Crisis ◽

Market Liquidity ◽

Equity Risk Premium ◽

Liquidity Premium ◽

Time Series Regression ◽

Equity Risk ◽

Determining Factors ◽

The Global Financial Crisis

<p>This paper proposes and tests market determinants of the equity risk premium (ERP) in Brazil. We use implied ERP, based on the Elton (1999) critique. We demonstrate that the calculation of implied, as opposed to historical ERP makes sense, because it varies, in the expected direction, with changes in fundamental market indicators. The ERP for Brazil is calculated as a mean of large samples of individual stock prices in each month in the January, 1995 to September, 2015 period, using the “implied risk premium” approach. As determinants of changes in the ERP we obtain, as significant, and in the expected direction: changes in CDI rate, country debt risk spread, US market liquidity premium and level of the S&P500. The influence of the proposed determining factors is tested with the use of time series regression analysis. The possibility of a change in that relationship with the 2008 crisis was also tested, and the results indicate that the global financial crisis had no significant impact on the nature of the relationship between the ERP and its determining factors. For comparison purposes, we also consider the same variables as determinants of the ERP calculated with average historical returns, as is common in professional practice. First, the constructed series does not exhibit any relationship to known market events. Second, the variables found to be significantly associated with historical ERP do not exhibit any intuitive relationship with compensation for market risk.</p>

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