This paper considers the measurement of the equity risk premium in financial markets. While there exists a vast amount of research into its behaviour, particularly in US markets, this is largely based on regression based techniques which do not capture well the dynamic and forward looking nature of the risk premium. In this paper the time variation of the unobserved risk premium is modelled by ...

Suppose a risk premium factor denotes the time-varying market prices of risk in the Treasury bond market. The question is whether the risk premium factor affects bond prices. Equivalently, we may ask whether the factor is spanned by the crosssection of term structure. This paper finds that the factor is almost but not completely hidden from term structure. Particularly, Treasury bill yields are...

We examine risk attitudes under regret theory and derive analytical expressions for two components—the resolution and regret premiums—of the risk premium under regret theory. We posit that regret-averse decision makers are risk seeking (resp., risk averse) for low (resp., high) probabilities of gains and that feedback concerning the forgone option reinforces risk attitudes. We test these hypoth...

This note defines the premium of a put option on the firm as a measure of insolvency risk. The put premium is not a coherent risk measure as defined by Artzner et al. (1999). It satisfies all the axioms for a coherent risk measure except one, the translation invariance axiom. However, it satisfies a weakened version of the translation invariance axiom that we label translation monotonicity. The...

The foreign exchange risk premium in a cash-in-advance model is investigated. Some weaknesses of the detinition of the risk premium generally used are discussed. It is shown that the primary ultimate source of foreign exchange risk is the covariance of monetary shocks with real output shocks. Several studies have assumed this covariance is zero, and hence assumed away the major source of risk i...

An overlapping generations model with long run inflation risk and a cash-in-advance constraint is used to derive a second-order accurate closed-form solution for the inflation risk premium on long-term government debt. The model predicts that the inflation risk premium depends crucially on the relative importance of nominal bonds and capital as sources of retirement consumption. In a calibrated...

Non-linear external habit persistence models, which feature prominently in the recent “equity premium” asset pricing and macroeconomics literature, generate counterfactual predictions in the cross-section of stock returns. In particular, we show that in the absence of crosssectional heterogeneity in firms’ cash-flow risk, these models produce a “growth premium,” that is, stocks with high price-...

1 Most of the models using option pricing techniques assume a zero risk premium. assume that any risk premium impounded in corporate spreads is captured by adjusting transition probabilities.