Numerous academic studies examine equity risk premium predictability based on various macroeconomic variables and price and volume based variables from stock market. In this article, we extend the frontier of the set of predictors from macroeconomic variables and stock market variables to foreign exchange market variables due to various reasons. Firstly, foreign exchange market reflects various...

We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker...

We consider a Diamond-type model of endogenous growth in which there are three assets: fiat money, government bonds, and equity. Because of productivity shocks, the equity return is uncertain, and risk-averse investors require a positive equity premium. Typically, there exist two steady states, but only one of them turns out to be stable. Tight monetary policy is harmful for growth in the stabl...

This paper o¤ers a monetary theory of asset liquidity— one that emphasizes the role of assets in payment arrangements— and it explores the implications of the theory for the relationship between assets’ intrinsic characteristics and liquidity, and the e¤ects of policy on asset prices and welfare. The environment is a random-matching economy where risk-free bonds coexist with a risky asset, equi...

We find that the true ex ante equity premium very likely lies within 50 basis points of 3.5%. This estimate is similar to values obtained in some recent studies but is considerably more precise. In addition to narrowing the range of plausible ex ante equity premia, we also find that equity premium models that allow for time-variation, breaks, and/or trends are the models that best match the exp...

This paper explores the effect of asymmetric information and entrepreneurial risk aversion on the dynamics of a small open economy. A private equity premium arises from the optimal contract between a domestic risk-averse borrower and a foreign lender, which, in general equilibrium, helps magnify the effect of shocks over time. In terms of an exchange rate regime comparison, when entrepreneurial...

This article investigates the impact of cash flow risk and discounting risk on the aggregate equity premium. Our approach is based on the idea that consumption is hard to measure empirically, so if we substitute out an empirically difficult-to-estimate marginal utility by a pricing kernel of observables, we can evaluate the empirical performance of an equilibrium asset pricing model in a differ...

Estimates of the historical equity risk premium in the UK are in the range 7% to 9% per annum. Until recently, portfolio investors and industrialists have been encouraged to use a premium of this order in making investment decisions. The purpose of this paper is to review the risk premium debate and to re-inforce the case for rejecting historical experience in formulating future investment plan...