Dissertations / Theses on the topic 'Equity risk premium'

Bakgrund: Marknadens riskpremie kan förklaras som den förväntade avkastning en investerare kräver för att acceptera en viss risk. Hur riskpremien skall bestämmas har stått i fokus för omfattande debatter de senaste åren men fortfarande har ingen ultimat lösning infunnit sig. Det finns två huvudsakliga tillvägagångssätt för att uppskatta riskpremien. Det ena att använda historisk data över aktieutvecklingen och därefter förvänta sig att en framtida utveckling kommer att vara likvärdig. Den andra är att göra uppskattningar av den framtida utvecklingen, så som framtida utdelningar, framtida vinster, BNP och inflation och därifrån göra en uppskattning utav riskpremien. Att använda sig av historiska värden har tidigare varit en accepterad metod både i den akademiska och finansiella värden men då den på senare tid har mötts av omfattande kritik, har modeller baserade på uppskattningar av framtiden vuxit sig starkare.

Syfte: Syftet med denna uppsats är att ge en djupgående beskrivning av hur svenska finansiella företag uppskattar och hanterar riskpremium för den svenska aktiemarknaden. Därigenom fanns en avsikt att studera vilken metod som främst användes, hur viktigt riskpremium i form av ett investeringsinstrument var, och morgondagens betydelse av riskpremium.

Metod: Författarna använde sig av en kvalitativ metod, där det empiriska materialet samlades in med hjälp av personliga intervjuer. Intervjufrågor av öppen karaktär skickades ut till respondenterna i förväg, och intervjuerna ägde därefter rum i Stockholm och Göteborg. I den teoretiska referensramen användes både så kallad primär och sekundär litteratur för att kunna redogöra en övergripande bild av problemområdet. Den primära litteraturen, som framförallt ligger till grund för kapitel tre, sågs extra viktig att inkludera då den möjliggjorde en minskad subjektivitet som annars hade riskerat att belasta uppsatsen.

Resultat: Resultaten visade en varierad syn mellan respondenterna där vissa ansåg att riskpremien hade ringa betydelse och andra att det var en mycket viktig variabel. Överlag fanns det dock ett ökat intresse de senaste åren. Även val av metod varierade och vare sig historisk data eller framtida uppskattningar kunde sägas ha ett övertag bland användarna. Avslutningsvis såg författarna ett ökat intresse för de ingående variablerna i modeller som baseras på framtida förväntade värden och kunde därav visa att den framtida debatten sannolikt kommer att behandla vilka variabler som bör inkluderas i denna typ av modeller och hur de bör uppskattas.

Equity Risk Premium (ERP) is the cornerstone in Financial Economics. It is a basic requirement in stock valuation, evaluation of portfolio performance and asset allocation. For the last decades, several studies have attempted to investigate the relationship between macroeconomic drivers of ERP. In this work, I empirically investigate the macroeconomic determinants of UK ERP. For this I parsimoniously cover a large body of literature stemming from ERP puzzle. I motivate the empirical investigation based on three mutually exclusive theoretical lenses. The thesis is organised in the journal paper format. In the first paper I review the literature on ERP over the past twenty-eight years. In particular, the aim of the paper is three fold. First, to review the methods and techniques, proposed by the literature to estimate ERP. Second, to review the literature that attempts to resolve the ERP puzzle, first coined by Mehra and Prescott (1985), by exploring five different types of modifications to the standard utility framework. And third, to review the literature that investigates and develops relationship between ERP and various macroeconomic and market factors in domestic and international context. I find that ERP puzzle is still a puzzle, within the universe of standard power utility framework and Consumption Capital Asset Pricing Model, a conclusion which is in line with Kocherlakota (1996) and Mehra (2003). In the second paper, I investigate the impact of structural monetary policy shocks on ex-post ERP. More specifically, the aim of this paper is to investigate the whether the response of UK ERP is different to the structural monetary policy shocks, before and after the implementation of Quantitative Easing in the UK. I find that monetary policy shocks negatively affect the ERP at aggregate level. However, 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 Bank of England’s monetary policy before and after the monetary stimulus. In the third paper I examine the impact of aggregate and disaggregate consumption shocks on the ex-post ERP of various FTSE indices and the 25 Fama-French style value-weighted portfolios, constructed on the basis of size and book-to-market characteristics. I extract consumption shocks using Structural Vector Autoregression (SVAR) and investigate its time-series and cross-sectional implications for ERP in the UK. These structural consumption shocks represent deviation of agent’s actual consumption path from its theoretically expected path. Aggregate consumption shocks seem to explain significant time variation in the ERP. At disaggregated level, when the actual consumption is less than expected, the ERP rises. Durable and Semi-durable consumption shocks have a greater impact on the ERP than non-durable consumption shocks. In the fourth and final paper I investigate the impact of short and long term market implied volatility on the UK ERP. I also examine the pricing implications of innovations to short and long term implied market volatility in the cross-section of stocks returns. I find that both the short and the long term implied volatility have significant negative impact on the aggregate ERP, while at sectoral level the impact is heterogeneous. I find both short and long term volatility is priced negatively indicating that (i) investors care both short and long term market implied volatility (ii) investors are ready to pay for insurance against these risks.

This thesis examines the realized equity premium and the equity risk premium puzzle in Finland during the years from 1913 to 2015. In the U.S. data, it has been noted that the attempt to connect the stock market and consumption data in the context of the consumption-based asset pricing model (CCAPM) leads to an implausibly high risk aversion parameter. The CCAPM restricts also the behavior of the risk-free rate, leading to what is termed the risk-free rate puzzle. We first present the properties of the consumption and stock market returns data, estimate the parameter values implied by the CCAPM for the Finnish data, use a dividend growth model to estimate the unconditional expected equity risk premium and finally examine the short-term predictability of dividend growth and the equity premium. We find that the joint equity premium and the risk-free rate puzzle does exist also in the Finnish data, though linking the realized average excess return to consumption data does not require a very high value for the risk aversion parameter. Because of the historically high inflation, the real risk-free rate has been very low, and correspondingly, the realized equity premium has been high in Finland. However, the high volatility of consumption growth does much to mitigate the puzzle. Also, the dividend growth estimate of the unconditional expected equity risk premium is not much less than the realized average excess return. We find evidence of short-term predictability in both dividend growth and the realized equity premium.

Syftet med uppsatsen är att diskutera det så kallade equity premium puzzle. Jag

analyserar teoretiskt den intertemporala konsumtionsbaserade CAPM (C-CAPM),

sammanställer en del av litteraturdiskussionen som finns på området samt empiriskt

testar C-CAPM på svensk data. Fenomenet equity premium puzzle innebär att

överavkastningen på aktier är så stor att det inte stämmer med den ekonomiska teorin.

Enligt teorin beror C-CAPMs riskpremie på kovariansen mellan konsumtionen och

aktieavkastningen. Litteraturen visar att forskare inte har lyckats förklara equity

premium puzzle genom att ändra antagandena i grundmodellen. Den empiriska

undersökningen visar att equity premium puzzle även uppkommer på svensk data.

Equity risk premium is a financial variable that is surrounded by mystery. Starting from the almost 30 year old equity premium puzzle caused by considerations that equity premium values which are observable in past data imply an implausibly high risk aversion to more recent statements that equity premium does not exist anymore. The purpose of this paper is to find out more about the traits and characteristics of equity risk premium, its current status and interactions of its values across international markets by conducting data analysis on mature equity markets using optimal methods as suggested in academic literature. This paper attempts to clear some of the confusion regarding equity premiums by analyzing equity excess returns in the mature equity markets of France, Germany, Sweden, United Kingdom and USA from 1970 to 2012. It is concluded that equity premium follows a mean reverting process however in short-term and mid-term its values can be volatile and in March 2000 there might have been a structural break. The obtained current equity premium values are significantly higher than zero. At the same time they are lower than popularly used values that are based on longer periods of past data. The paper also finds out that equity premiums in different countries are highly correlated not only due to shared global influence but also due to some direct causality relationships between them, most of which are positive. A panel data analysis is conducted as well to test the explanatory power of some macroeconomic and financial variables on the equity risk premium values and it is concluded that risk-free rate and unemployment rate have some explanatory power for equity risk premium values. This paper manages to clear a part of the mystery that surrounds the equity risk premium.

We apply regime-switching models to study the dynamic switching behaviour of equity risk premia. Traditionally, equity risk premia have been estimated assuming a single regime exists. Regime-switching models allow for the existence of two, or more, regimes. Three regime-switching models are employed: structural break models, threshold models and Markov regime-switching models. Both structural break models and threshold models assume that the switching mechanism is deterministic. The former allow for only a single break and the state variable is solely determined by time. Under the latter, multiple changes are allowed and the state variable is determined by an observable variable with respect to an unobserved threshold. In Markov regime-switching models, equity risk premia are allowed to switch probabilistically for each observation. This is achieved by introducing a state variable which is governed by a Markov process. To capture the co-movements among financial variables, we extend regime-switching models to a VAR framework, employing threshold autoregressive vector models and Markov regime-switching vector models. We estimate models of UK equity risk premia conditionally on the state variable which is related to business conditions. The results of non-linearity tests favour regime-switching models and suggest that regime-switching is an important characteristic of UK equity risk premia.

This research aims to identify the determinants of the ex-ante risk premium required by Italian private equity funds (PEFs) when valuing privately-held target companies. In theory, perceived risk is a key driver of expected returns and anticipated value, but: "Although PE (private equity) has experienced rapid growth, the risk and return profile of this asset class is not well understood." (Jegadeesh et al., 2009). Some papers have attempted to assess the ex post returns pioneered by Lerner & Gompers (1997). Yet such studies reveal both contradictory conclusions and hitherto inexplicable phenomena: what some authors call the 'private equity premium puzzle' (Moskowitz & Jorgensen, 2000). Such contradictory conclusions include a wide spread of abnormal realized returns ranging from -6% (Phalippou & Gottschalg, 2009) to +32% (Cochrane, 2005). In this research, the perceived risk and expected return drivers refer not to the ex-post realized return that PEF investors actually achieve, but to the required return the PEF hopes to gain from the target investment. At this stage, two important indicators adopted in PEF parlance have to be differentiated: (i) the Expected IRR (E.IRR) and (ii) the Threshold IRR (T.IRR). The first is the IRR as an output of a business plan, and the second assesses the return expected by PEFs according to the risk perceived in the business plan. Put simply, these are respectively, the anticipated return and the (risk-adjusted) required return. The study of the T.IRR is one of the main contributions of this thesis since it has never been studied before by academia as an indicator of the ex-ante perceived risk of a PEF target company. This is partly due to two important reasons. First, most previous papers examine ex-post performance, and only a few (e.g. Manigart et al., 2002), try to assess return expectations and risk perceptions using an ex-ante perspective. Second, most of the prior studies are quantitative and try to measure statistical effects captured by the ex-post IRR. By studying 26 deals (in 13 Italian PEFs) in detail (qualitatively and quantitatively), this research project has been able to observe how PEFs assess risk and estimate the T.IRR. The research project reveals that PEFs apply neither rational-based models nor explicit formulae to assess risk exante. By observing a set of phenomena unique to the PEF sector (fees effect, investment speed effect, persistence effect, money-chasing deal phenomenon, illiquidity effect, etc) whose existence has been suggested by many recent papers, this thesis has been able to propose an adjusted version of the three-factor model of Fama and French (1993, 1995) to assess risk. The application of a quasi-rational-based asset pricing model to guide PEFs assessments is also an important contribution of this thesis. In fact, Franzoni, Nowak and Phalippou (2010), claim to be the first to calculate the PEFs' cost of capital by applying asset pricing models. However, their approaches are not only based on the observations of realized returns, but also consider only one additional factor to the standard Fama & French three-factor model (1993), the liquidity factor. In contrast, the results and the model proposed by this thesis are based on qualitative and quantitative ex-ante information and include not only the classical factors of that model, but also some other factors intended to explain some of the phenomena listed above which might also drive the risk premium in private equity funds. Based, therefore, on explaining the behavior of PEFs, the research develops a framework that can be applied by Italian PEFs and perhaps other PEFs in a more rational manner than their past behavior suggests.

Investors accept that there is uncertainty, or risk, associated with equity investment returns. Consequently, equities are normally priced so that they provide a premium to the returns available on risk-free investments. Equity returns, however, are cyclical. There can be long periods when equity returns greatly exceed risk-free returns; there can be long periods when the premium disappears altogether. This thesis explores the influences and driving forces in equity markets, with a particular emphasis on the UK equity market. Both rational and irrational influences are examined and discussed. A General Literature Review examines the general progression in academic thinking in the area of equity pricing over four decades and takes a close look at the concepts of market efficiency and the challenges mounted by behavioural finance. The “equity risk premium puzzle” is also examined. Chapters 3 to 6 contain empirical studies of the variation in UK equity returns over time from four angles. The chapters look, respectively, at: macro-economic influences on the equity market; the relationship between equity returns and market volatility; the impact of variation in risk-free returns; a full decomposition of both ex-ante and ex-post equity returns. Reassuringly, the results confirm that the UK equity market is driven, in the main, by economic factors. However, the results also indicate that the full set of influences on the equity market is complex. The analyses undertaken suggest that significant swings occur in the risk premium element of expected equity returns. The results also suggest that there are periods when the UK equity market may be in disequilibrium with other financial markets. It is not the contention that many of the puzzles that have confronted equity market researchers over recent decades are now resolved by the analyses undertaken and presented in this thesis. It is to be hoped, however, that a useful platform has been built from which further investigation and analysis can be taken forward. In particular, it is suggested that comprehensive surveys of long-term expectations could lead to a better understanding of equity market mechanisms.

Presented here are consumption and production related asset pricing models which seek to explain stock market behaviour through the stock premium over risk-free bonds and to do so using parameter values consistent with theory. Our results show that there are models capable of explaining stock market behaviour. For the consumption-based model, we avoid many of the suggestions to artificially boost the predicted stock premium such as modelling consumption as leverage claims; instead we use the notion of surplus consumption. We find that with surplus consumption, there are models including the much-maligned power utility model, capable of yielding theory consistent estimates for the discount rate, risk-free rate as well as the coefficient of relative risk aversion, y. Since real business cycle theory assumes a risk aversion coefficient of 1, we conclude that our model which gives a value close to but not equal to 1, provides an indication of the impact of market imperfections. For production, we present many of the existing models which seek to explain stock market behaviour using production data which we find to be generally incapable of explaining stock market behaviour. We conclude by presenting a profit based formulation which uses deviations of actual from expected profits and dividends via stock price reaction parameters to successfully explain stock market behaviour. We also conclude that the use of a profit based formulation allows for a link to investment, output and pricing decisions and hence link consumption and production.

Understanding the Equity Risk Premium (ERP) and the factors affecting it is cardinal to financial economics, particularly to equity research analysts, domestic and international institutional investors and financial economist. Since the seminal work of Mehra and Prescott (1985) there has been an exponential rise in the research explaining the reasons for ERP puzzle. This review, systematically, investigates the literature related to ERP in four key dimensions. The first dimension is regarding the issues related to different techniques of estimating the ERP. The second dimension is regarding the studies that explain the reasons of existence of the ERP puzzle by making modifications to the preference structures. The third is regarding the macroeconomic variables that help in predicting ERP and the fourth deals with studies that are conducted in the international context. In addition to this, this review meticulously captures some important limitations of the existing literature regarding the estimation of ERP and identifies the domestic and international determinants of ERP, in particular the UK ERP and proposes novel future directions of research. These future research directions have two important implications for my PhD. The first is the academic contribution that predominantly comes from methodological contribution of estimating the ERP. The second is the practical contribution that comes mainly from identifying the unique set of variables (UK domestic and international), which are of prime importance to the domestic and foreign institutional investors because of the financial crisis of 2008-2009 and which should affect the UK ERP.

This dissertation addresses issues concerning liquidity and its volatility. It consists of two essays. The first essay, "Liquidity, Macro Factors and the U.S. Equity Flows to Emerging Markets", examines the role of liquidity on equity flows from the U.S. to fifteen emerging markets around the world. Since liquidity has many dimensions, an emphasis is placed on utilizing various measures of liquidity. Moreover, both static and dynamic analyses, as well as short and long-horizon regressions, are performed to investigate the research questions. The results suggest that a liquid market attracts flows, after controlling for market size, political openness, exchange rate and other macro factors. Additionally, evidence indicates that the importance of liquidity varies across regions. For instance in the Asian region, the relation between equity flows and volume-related liquidity is weak while that between flows and price impacts of trading is strong. Evidence also supports the relevance of macro factors such as a country's economic freedom. The second essay, "Liquidity Risk Premium Puzzle and Possible Explanations", attempts to resolve the liquidity risk puzzle: a negative relation between returns and liquidity risk, documented by Chordia, Subrahmanyam, and Anshuman (2001b), by employing alternative liquidity measures and by incorporating factors that might potentially affect the relation. The main findings are as follows. The relation between stock returns and volatility of liquidity depends on the measure of liquidity. When liquidity measures are based on trading volume, the results are largely mixed, but when liquidity is measured based on price impact of trading, the relation between returns and volatility of price impacts is positive, as expected. The results are sensitive to time periods examined. Moreover, during extreme down markets, the aversion to liquidity volatility is lower, suggesting behavioral bias might potentially address the puzzle. Empirical findings also suggest that liquidity risk premium tends to be greater for small stocks. Finally, when the VIX index is included as a proxy for investor sentiment, the results indicate that the relation between returns and liquidity risk is significantly positive in four out of five liquidity measures. In sum, the empirical analysis partially but not completely addresses the puzzle.

This thesis stimulated and inspired by failings in the current literature investigates a series of issues relating to the UK Equity Risk Premium Puzzle. The UK market is focussed upon given prior research is heavily concentrated on the us market. The prior literature also focuses upon the aggregate equity premium. This thesis makes another important extension to prior work by analysing the equity premium for portfolios formed on cross-sectional characteristics such as size or industry. Specifically, it addresses the following three main issues. Firstly, is the historical equity premium an appropriate proxy for the expected equity premium? Secondly, does the use of the ex-post equity premium overstate the magnitude of the ex-ante equity premium puzzle? Thirdly, do low frequency equity returns follow different regimes over time? The main results indicate that the alignment of ex-post equity returns with fundamental measures of equity returns depends upon both the time period considered and the measure of fundamental used. Empirical evidence also supports the view that the expected equity premium follows different regimes and thus does vary over time. This low-frequency time variation in expected returns appears to, in general, be systematic, affecting portfolios within the market at a similar time. Our results contribute to the academic literature and also have important implications for practitioners by offering insight into the nature of the Equity Premium Puzzle and the appropriateness of using ex-post returns as a proxy for ex-ante returns.

The market risk premium is one of the most important parameters in finance. Its value and the ways to calculate a risk premium for the market is a widely debated subject. This thesis examines numerous ways of calculating a risk premium for the Swedish market with regard to how good an estimation they make of a real risk premium. Estimations based on historical periods ranging from 20 to 85 years is calculated as well as a premium based on forward-looking estimates. The real risk premium is solved out for a selection of companies and an index with the help of CAPM. An examination of these estimates leads to the conclusion that historical estimates of a risk premium may be outdated. The implication of this is that more effort should be put into examining a risk premium based on forward-looking estimates. In this context a thorough analysis of fundamentals should be added into the calculation.

O Prêmio de Risco do mercado acionário, infelizmente, não possui uma definição universalmente aceita. O material já publicado sobre o tema Prêmio de Risco do mercado acionário é muito vasto e abrangente, abordando desde análises ex- post sobre dados históricos (com diversos períodos amostrais, intervalos de observação, fatores de ajuste e em diversos países) até estimativas do prêmio ex-ante através dos mais variados modelos baseados em variáveis tais como aversão a risco, crescimento do consumo, dados contábeis e dividend yield, entre outros. O objetivo desta dissertação será analisarmos uma condensação das várias abordagens utilizadas, seus resultados e contribuições. Frente as significativas diferenças encontradas ao se computar o prêmio de risco, é fundamental o usuário da estimativa do prêmio de risco saber claramente qual a definição usada na estimativa e por que tal definição seria apropriada para seu propósito particular. No final dessa dissertação realizaremos uma estimativa do prêmio de risco no Brasil com base em um estudo de 1993 realizado pela McKinsey e Company, Inc.
Unfortunately, there is no universally accepted definition of the Equity Risk Premium. Available material on the theme are very broad and deep, ranging from ex-post analysis on historical data -with distinct samples in different time periods- to ex-ante estimates of the equity premium making use of several models based in variables such as risk aversion, consumption growth, accounting data and dividend yield, among others. The objective of this paper will be to analyze a compilation of several approaches taken, their results and contributions. In face of the significant differences presented when computing the equity premium, it is key for the investor who will make use of the equity premium estimate to know clearly which definition of the premium he will be using and why is that definition appropriate for his particular purpose. In the final chapter we will estimate the equity risk premium in Brazil based on a study developed in 1993 by McKinsey and Company, Inc.

This paper adds to the understanding and transparency of equity pricing in emerging markets. Its novel contribution is that it empirically investigates the pricing of Country Risk in BRIC markets, using a two-factor intertemporal pricing model. Bridging the gap between academics and practitioners, this paper contributes to the debate as to whether or not it is justified to adjust discount rates for emerging market companies – as given by the CAPM – by including an unconditional country risk premium. In choosing between country risk proxies, the sovereign yield spread adjusted for relative equity volatility appears to supersede the classical sovereign yield spread in explaining return variations. Evidence is presented that country risk is priced in India and China indicating some type of market segmentation; in these markets, the addition of a country risk premium to the discount rate is justified. Moreover, the paper complements the market integration literature in that it is shown that the correlation between the change in country risk premium and the equity risk premium might show signs of market segmentation or market integration, rendering the pricing factor for country risk in specific countries significant or insignificant, respectively. © 2010 Soeriowardojo, G.T. All rights reserved.

In order to assure a livelihood for the working population after retirement, the national retirement pension was developed. The system is based on 18.5% of each tax-paying worker’s annual salary. The national retirement pension system in Sweden consist of two parts. The first and largest part contributing with 16 percentage points, of the 18.5%, is a defined benefit plan, named the income pension. The second part contributing with 2.5 percentage points, of the 18.5%, is the premium pension, which is a defined contribution plan. The premium pension is the sole part of the national retirement pension controlled by the individual employee, with the opportunity to actively invest in a broad selection of domestic and international funds. Investors not making a choice will be transferred into the governments default fund, named the seventh AP fund. By investing in funds, the premium pension is partly based on each worker’s annual salary but also on the development of the financial market. This thesis has two purposes, the first is to investigate if the default alternative, the seventh AP fund has had a superior risk-adjusted return compared to fifty of the most commonly selected equity funds available in the premium pension selection. The second purpose is to construct portfolios for active investors with different risk-tolerance in order to compare the risk-adjusted return between an investor that has made an active investment in comparison to an investor that has not made an active choice. To conclude, this thesis shows that there are superior funds to select, with regard to risk-adjusted return and risk-exposure, as an alternative to the seventh AP fund. In addition to this, the portfolio construction included in this thesis has proven that active participants can achieve results that are more compatible with their risk preferences in comparison to remaining in the default fund option. However, it is important for investors to remain active and alter their fund selections throughout the years, in order to attain the preferable outcome.

I ask whether added liquidity factors improve the ability of the Sharp-Lintner CAPM and the Fama French three-factor model to explain asset returns, ex-post, in the Norwegian stock market. Through cross-sectional and time-series regression tests, on both the original and the liquidity-augmented versions of the equity risk premium models, I search for a reversed liquidity premium in the period 2006-2011. I find that the liquidity factors, represented by the bid-ask spread and turnover, marginally improve the empirical ability of the models to explain asset prices and conclude that there is empirical support for a multidimensional liquidity premium. The implications of my results contradict flight-to-liquidity theory and suggest that different dimensions of liquidity are rewarded a premium in different stages of the business-cycle - offering liquidity based rationale for the size and value-effect.

This thesis seeks to address three important issues relating to the efficient functioning of the Istanbul Stock Exchange. In particular the thesis seeks to answer the following questions 1. What makes markets informationally efficient or inefficient? 2. Has increased stock market volatility had an impact on the equity risk premium and the cost of equity capital to firms? and 3. How is it possible to reconcile the view that markets are weak form efficient and technical analysis is a pervasive activity in such markets? Unlike previous studies, this thesis seeks to examine the issue of efficiency when institutional features specific to the market under investigation are taken into account. Specifically, the thesis adopts a testing methodology which enables us to recognize possible non-linear behaviour, thin trading and institutional changes in testing market efficiency. The results from this investigation show that informationally efficient markets are brought about by improving liquidity, ensuring that investors have access to high quality and reliable information and minimising the institutional restrictions on trading. In addition, the results suggest that emerging markets may initially be characterised as inefficient but over time, with the right regulatory framework, will develop into efficient and effective markets. The second important issue to be examined in this thesis concerns the impact of regulatory changes on market volatility and the cost of equity capital to firms. It is not sufficient to simply examine whether volatility has increased following a fmancial market innovation such as changes in regulation. Rather, it is necessary to investigate why volatility has changed, if it has changed, and the impact of such a change on the equity risk premium and the cost of equity capital to firms. Only then can inferences be drawn about the desirability or otherwise of innovations which bring about increases in volatility. Surprisingly, these issues have not been addressed in the literature. The evidence presented here suggests that the innovations which have taken place in the ISE have increased volatility, but also improved the pricing efficiency of the market and reduced the cost of equity capital to firms. Finally, the thesis tries to identify the conditions under which weak-form efficiency is consistent with technical analysis. It is shown that this paradox can be explained if adjustments to information are not immediate, such that market statistics, in particular statistics on trading volume contain information not impounded in current prices. In this context technical analysis on volume can be viewed as part of the process by which traders learn about fundamentals. Therefore, the thesis investigates the issue whether studying the joint dynamics of stock prices and trading volume can be used to predict weakly efficient stock prices. In summary, the findings of this thesis will be of interest to international investors, stock market regulators, firms raising funds from stock markets and participants in emerging capital markets in general. The implication of the results presented here is that informational efficient emerging markets are brought about by improving liquidity, ensuring that investors have access to high quality and reliable information and minimising the institutional restrictions on trading. In addition, the evolution in the regulatory framework of, and knowledge and awareness of investors in, emerging markets may mean that they will initially be characterised by inefficiency, but over time will develop into informational efficient and effectively functioning markets which allocate resources efficiently. In addition, the results of this thesis have important implications, for emerging markets in general, in identifying the regulatory framework that will achieve efficient pricing and a reduction in the cost of equity capital to firms operating in the economy.

The cost of equity is used extensively for capital allocation decisions, and the various methods used to estimate it often result in materially different outcomes. A model of the impact of known risk factors on the implied cost of equity used by equity analysts, who are seen as informed market participants, could be a guideline and sense check for other professionals estimating cost of equity for capital allocation decisions. This study, an implementation of Arbitrage Pricing Theory, attempts to create a parsimonious model of factors that are associated with the implied cost of equity premium utilised by equity analysts on the New York Stock Exchange ("NYSE"). After limiting the sample to NYSE-listed companies that were primarily exposed to US macro-economic conditions and were likely to be valued overwhelmingly on a going-concern basis, the test sample consisted of 5,343 company quarters covering the period 2006 to 2015. In the first part of the methodology, sixteen factors identified from previous literature as possibly influencing the cost of equity were tested for their association with the implied equity risk premium, as calculated from analysts' two-year earnings forecasts and target share prices using the Easton-method. Only those factors that were statistically significantly associated with the implied cost of equity were retained for the second part of the methodology, in which mixed effects modelling and optimisation using the Akaike information criterion was used to find a parsimonious model linking the statistically most significant factors to the implied cost of equity. The final model could explain 40% of the variation in implied risk premium by the fixed effects (specified variables), and 62% when the random effects (observable effects of unspecified variables) were included. The study found that the risk free rate was most strongly (and negatively) associated with the size of the implied equity risk premium. Other factors that are statistically significantly associated with the implied equity risk premium are the two-year beta (+), the profitability dummy variable (-), return on equity (-), two-year share price volatility (+), long-term growth (+), Market momentum (+), and the debt to equity ratio (+). It was further found that not all factors which have historically been shown to influence returns are significantly associated with implied cost of equity estimates, which is contrary to expectations in a fully efficient market, where the only difference in the two would result from the information that changes cash flow expectations or the risk profile of the cash flows. This study contributes to the current body of literature on cost of equity in the following ways: • To the author's knowledge, this study combines a far wider array of factors of all types than any of the previous studies on the topic, and uses target prices rather than market prices to calculate the implied cost of equity premium. • The study uses the adaptive and recursive option valuation model to eliminate companies for which the testing would not be relevant. • The study used mixed effects modelling to measure the impact of the various factors on the cost of equity premium.

This thesis contains empirical studies of portfolio choice and asset prices. The first two chapters deal with incorporating labor supply into models traditionally only focusing on consumption. Can the risk premium on stocks be better understood when taking labor supply into account? This is the topic of the first chapter. Do possibilities of varying labor supply, and thus hedging stock market risk, help explain the stock ownership patterns of households? This question is what the second chapter tries to answer. If labor income moves with the stock market, an attempt should be made to hedge this with a lower share of stocks in the portfolio and, but do households act according to this rule? This is what the third chapter investigates. Chapter one, Labor Supply Flexibility and Portfolio Choice: Evidence from the PSID, examines the relationship between labor supply flexibility and portfolio choice. Theoretical articles have shown that, ceteris paribus, the optimal portfolio share of risky assets (stocks) increases with labor supply flexibility, due to increased possibilities of hedging financial risk by adjusting the labor supply. Using PSID household data, this hypothesis is tested using a direct measure of labor supply flexibility from survey questions. The results indicate that the total portfolio share is increased by labor supply flexibility. When separated, most of this effect seems to come from the increased probability of stock ownership due to flexible labor, rather than an increased portfolio share among stockholders. Chapter two, Can Leisure Explain the Equity Premium Puzzle? An Empirical Investigation, investigates the asset pricing properties of non-separable utility functions with consumption and leisure. The parameter restrictions needed to match the historical equity premium are explored using US data on consumption, hours and returns. Empirically, it is shown that to match the equity premium with a low level of risk aversion, consumption and leisure need to be strong complements, i.e. have a very low substitution elasticity. Chapter three, Income Risk and Stockholdings: Evidence from Swedish Microdata, examines the relationship between income risk and portfolio choice. It empirically investigates whether the stock market risk (the covariation with the stock market) in labor income is reflected by an offsetting lower share of stocks in financial portfolios, an effect that has been shown to exist in theoretical articles. Swedish microdata from HINK on households’ income and wealth are used for this purpose. In repeated cross-sections, households are divided into "portfolio cohorts" corresponding to percentiles of the share of stocks in financial assets. Income risk, i.e. the regression beta of (log) income growth on aggregate stock returns, is compared for the different groups. As predicted by theory, the results provide some support for a negative relationship between income risk and the share of stocks.
Diss. Stockholm : Handelshögsk., 2004

Mestrado em Finanças - Edição Cabo Verde
0 objectivo do presente estudo é a estimação do Prémio de Risco de Cabo Verde. Este trabalho teve como base as informações sobre as empresas cotadas, fornecidas pela Bolsa de Valores de Cabo Verde, e os dados sobre as Obrigações do Tesouro, disponibilizados pela Direcção Geral do Tesouro e Banco Central de Cabo Verde. Tratando-se de um estudo pioneiro em Cabo Verde, e com uma Bolsa de Valores com quatro anos de existência, foram utilizados vários métodos de estimação do prémio de risco, a partir dos quais procurou se analisar, compreender e comparar os resultados obtidos por cada um dos métodos. Iniciou se este trabalho com a revisão da literatura e uma abordagem teórica sobre o premio de risco. Seguidamente, calculou-se o prémio de risco de Cabo Verde, a partir de diferentes métodos. Finalmente, deixou-se uma série de conclusões, indicando o valor mais alto e o valor mais baixo do prémio de risco obtido, e apontando o valor, mais provável, do prémio de risco a vigorar em Cabo Verde.
The objective of this study is to estimate the cap-verdian's equity Risk Premium. This paper has based on informations from Stock market of Cap Vert, and available dates about Treasury Bonds, giving by Treasury's General Direction and Central bank of Cap Vert, This is the first study do in Cap-Vert, where the stock market is no more four years old. So, there are used the differents methods and models to calculate the risk premium, from what there's training to analyze, understand and compare the results from each models. This work is beginning to do the literature revision and theoretical concept about the equity risk premium. Then, it was calculating the equity risk premium, using differents methods and models. Finally, it was giving some conclusions, indicating the high and the low value of equity risk premium it had gotten, and handing, more probably equity risk premium, in Cap Vert.

Value and size related equity investment strategies are supported by a large body of empirical research that shows a persistent premium, both longitudinally and crosssectionally. However, the competing rational and behavioural finance explanations for the success of these strategies are a subject of debate. The rational explanation is that the premium earned on value shares or shares of small companies can be attributed to higher risk. Behaviouralists argue that such shares are not riskier and attribute the premium to cognitive errors and biases in human decision making. The purpose of this study is to determine, firstly, whether the value and size premium exist in South Africa during the period July 2006 to June 2012, which includes one of the worst equity market crises in history. Secondly, this study sets out to determine whether the premium earned on value and size strategies are adequately explained by the principles of rational finance theory. To provide evidence regarding the existence of the value premium and size effect, returns are analysed, cross-sectionally, on portfolios of shares sorted by value and size. For evidence of a rational explanation, returns are regressed on value and size variables, and the relative riskiness of value and small companies is analysed. The results show evidence of a value premium in portfolios of small companies, but not big companies. The size effect is found not to be statistically significant. While regressions do show significant relationships between value and size variables and returns, these variables are found not to be associated with higher levels of risk. The conclusion is that the evidence does not support a rational, risk based explanation of the returns

The aim of the work is to analyze the theoretical basis of determination of the market risk premium in conditions of the national market in the Czech Republic with CAPM and practical procedures of its determination using the market data provided by Bloomberg. The work addresses some open problems of practical determination of market risk premium as a choice between historical and implied risk premium, determination of credit spread as a representative of country risk and accurate determination of the equity and bond market volatility ratio. The thesis also contains research on the cost of equity and single-factor sensitivity analysis demonstrating the significant influence of a small change in one parameter entering the calculation of the discount rate on the resulting value.

Le Bris a collecté environ 200 000 données sur les actions françaises entre 1854 et 1988 pour construire un indice de performances.Différents biais qui surestimaient la rentabilité dans les indices français existants sont identifiés. D’autres probables cas à l’étranger sont présentés.Sur le long terme, les actions offrent une meilleure rentabilité que les autres actifs mais sans prime particulière.Par rapport aux actions américaines, les françaises sous-performent y compris durant les périodes de paix.Le marché est très sensible aux changements de gouvernements et surperforme sous ceux de gauche.Une nouvelle méthode de détection des krachs est proposée. Elle identifie des krachs cohérents avec l’histoire.Les entreprises de services dominent la capitalisation boursière de manière quasi-continue depuis 1854.La rationalité des investissements en emprunts russes avant 1914 est démontrée grâce à une optimisation de portefeuille parmi les actifs français (action, obligation, rente) et huit emprunts d’Etats étrangers.Une nouvelle méthode de décomposition du bénéfice de diversification est proposée ; les investisseurs français étaient attirés par la faible corrélation plus que par les rentabilités étrangères supérieures avant 1914.Les actions françaises et américaines présentent une hausse de corrélation sur le long terme probablement suivant l’intégration des économies. Ainsi, l’incitation à diversifier internationalement a baissé.Le risque de marché enregistre une forte hausse durant l’entre-deux-guerres et le niveau pré-1914 n’est jamais retrouvé. Il semble lié à la fin du Gold Standard, à l’inflation et aux déficits publics.Conséquence de la hausse de ce risque commun, la corrélation entre actions françaises augmente, réduisant l’effet de diversification domestique ; a l’opposé un « super effet portefeuille » est identifiée avant 1914
Le Bris, collecting about 200,000 data on French stocks from 1854 to 1988, builds a performance index. Several biases leading to overestimate the returns in prior French indices are demonstrated, as well as other probable examples across the globe.Over the long run, French stocks provide a better return than other assets, but without any excessive premium.Compared to US stocks, French stocks have underperformed since 1914, including during the periods of peace.The French stock market is highly sensitive to governmental changes, and overperforms under the left ones.A new method to identify market crashes is proposed. This method identifies crashes that are consistent withhistory.Firms from service industries have almost always dominated market capitalization since 1854.The rationality of the French investments in Russian bonds, before 1914, is demonstrated thanks to a portfoliooptimization among French assets (stock, bonds and corporate bonds) and eight international state bonds.A new method to decompose the benefit of diversification is proposed; before 1914, French investors wereclearly attracted by low foreign correlation rather than higher foreign returns.French and US stocks present a long-term rise in correlation, probably following the economic integration.Thus, the incentive to diversify through international markets has decreased.The market risk exhibits a significant rise during the interwar-period, and the pre-1914 level is never reachedagain. This risk appears to be linked to the end of the Gold Standard, the inflation rate and the public deficits.The consequence of the rise of this common risk is that the correlation among French stocks trend upwards, andthen, reduce the domestic portfolio effect; reversely, before 1914, a “super portfolio effect” is identified

Mestrado em Econometria Aplicada e Previsão
No presente trabalho é apresentada uma metodologia de estimação do índice de cauda, que assenta numa regressão exponencial do parâmetro função de variáveis explicativas. O método de estimação é o de Quase Máxima Verosimilhança baseada na função log-verosimilhança de Pareto de tipo I. A metodologia em estudo é aplicada às observações do prémio de risco do mercado acionista. Neste sentido, pretende-se explicar os valores extremos da aba esquerda da distribuição dos dados, com recurso a um conjunto de variáveis estudadas na literatura, no contexto do mercado de ações. Os resultados sugerem que as variáveis mais relevantes para explicar a variável de interesse são regressores que representam situações de crise e incerteza social, política e económica, para cada momento de tempo. Os resultados finais indicam que o prémio de risco tem uma massa de probabilidade considerável associada a valores extremos da série.
In the present work a tail index estimation methodology is presented, which is based on an exponential regression of the parameter function of explanatory variables. The estimation method is the Quasi Maximum Likelihood based on the Pareto log-likelihood function of type I. The methodology under study is applied to the observations of the risk premium of the stock market. In this sense, it is intended to explain the extreme values of the left-hand tail of the data distribution, using a set of variables studied in the literature, in the context of the stock market. The results suggest that the most relevant variables to explain the variable of interest are regressors that represent situations of crisis and social, political and economic uncertainty, for each moment of time. The final results indicate that the risk premium has a considerable probability mass associated with extreme values of the series.
info:eu-repo/semantics/publishedVersion

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This doctoral thesis is composed of three chapters related to portfolio theory and model uncertainty. The first paper investigates how ambiguity averse agents explain the equity premium puzzle for a large group of countries including both Advanced Economies (AE) and Emerging Markets (EM). In the second article, we develop a general robust allocation framework that is capable of dealing with parametric and non parametric asset allocation models. In the final paper, I investigate portfolio selection criteria and analyze a set of portfolios out of sample performance in terms of Sharpe ratio (SR) and Certainty Equivalent (CEQ)

Aquesta tesi pretén descobrir, de manera empírica, nous aspectes de la secció transversal dels rendiments del capital i oferir explicacions teòriques i empíriques de les seves conclusions principals. La tesi documenta nous predictors de preus i altres factors relacionats amb els nivells d’incertesa i d’imprecisió de la informació continguda en diferents mesures del risc. Al primer capítol, s’estudia si la volatilitat de la sèrie temporal del book-to-market (BM), anomenada incertesa de valor (value uncertainty, UNC) és valorada en la secció transversal dels rendiments del capital. Un factor ponderat per valor i ajustat per mida amb una posició llarga (curta) en accions d’alta (baixa) incertesa genera un alfa anualitzat del 6-8%. Aquesta prima d’incertesa de valor es veu impulsada pels resultats extraordinaris de les empreses d’UNC alta i no s’explica pels factors de risc establerts o per les característiques de l’empresa, com la dinàmica dels beneficis i dels preus, la inversió, la rendibilitat o el propi BM. A nivell agregat, la UNC està correlacionada amb els fonaments macroeconòmics i prediu els rendiments futurs del mercat, així com la seva volatilitat. En aquest capítol, també es dona una explicació racional per a la fixació del preu dels actius de la prima d’UNC no coberta. El segon capítol és una ampliació del primer i examina el poder predictiu de la incertesa de la rendibilitat (uncertainty of profitability, UP) en la secció transversal dels rendiments del capital. Una estratègia de cartera amb una posició llarga en accions d’alta volatilitat i curta en accions baixa volatilitat genera una taxa de rendiment brut anual (ajustada al risc) del 8% (10%). Les accions d’UP alta tindrien rendiments més alts en temps de més rendibilitat i menys volatilitat de mercat, i més inflació esperada, cosa que justificaria la prima documentada. Les empreses amb més incertesa sobre el creixement dels seus actius (uncertainty of asset growth, UAG) superarien aquelles amb menys incertesa sobre aquest creixement en un 7% (12%) en rendiment brut (ajustat al risc) de risc excessiu. Aquests resultats mostren la importància de la volatilitat dels factors de risc en les decisions d’inversió. Al tercer capítol, s’estudia l’impacte que té la imprecisió en l’expectativa de guanys de la direcció (management earnings guidance, IMP) sobre els rendiments del capital. L’evidència empírica revela que una IMP alta (un interval més gran en els ingressos previstos) s’associa a uns rendiments subsegüents més baixos de les accions. S’ofereixen dues explicacions complementàries per explicar aquests baixos rendiments. Primera, en un mercat que presenta limitacions a la venda en descobert i disparitat d’opinions sobre les estimacions de beneficis, una IMP alta desanima els inversors pessimistes, mentre que els optimistes creuen en el gran salt de rang i prenen posicions llargues basant-se en aquestes creences, cosa que provoca sobrevaloracions de les accions i, en darrera instància, rendibilitats més baixes. Segona, una IMP alta pot reflectir una genuïna incertesa pel que fa als guanys futurs, i això pot atreure els inversors en valor o de loteria. Les conclusions són sòlides, a nivell d’anàlisi de la cartera i de les accions, per al mesurament de la imprecisió i per a diferents models de fixació de preus dels actius.
Esta tesis pretende descubrir, de forma empírica, nuevos aspectos de la sección transversal de los rendimientos del capital y proporcionar explicaciones teóricas y empíricas de sus principales conclusiones. La tesis documenta nuevos indicadores de precios y otros factores relacionados con los niveles de incertidumbre y de imprecisión de la información contenida en distintas medidas del riesgo. En el primer capítulo, se investiga si la volatilidad de la serie temporal del book-to-market (BM), denominada incertidumbre de valor (value uncertainty, UNC) es estimada en la sección transversal de los rendimientos del capital. Un factor ponderado por valor y ajustado por tamaño con una posición larga (corta) en acciones de alta (baja) incertidumbre genera un alfa anualizado del 6-8%. Esta prima de incertidumbre de valor es impulsada por los resultados extraordinarios de las empresas de alta UNC y no se explica por los factores de riesgo establecidos o por las características de la empresa, como la tendencia de los beneficios y los precios, la inversión, la rentabilidad o el propio BM. A nivel agregado, la UNC está correlacionada con los fundamentos macroeconómicos y predice los rendimientos futuros del mercado, así como la volatilidad del mercado. En este capítulo, también se proporciona una explicación racional para la fijación del precio de los activos de la prima de UNC no cubierta. El segundo capítulo es una ampliación del primero y examina el poder predictivo de la incertidumbre de rentabilidad (uncertainty of profitability, UP) en la sección transversal de los rendimientos del capital. Una estrategia de cartera con una posición larga en acciones de alta volatilidad y corta en acciones baja volatilidad genera una tasa de rendimiento bruto anual (ajustada al riesgo) del 8% (10%). Las acciones de alta UP tendrían mayores rendimientos en tiempos de mayor rentabilidad de mercado, menor volatilidad de mercado y mayor inflación esperada que justifica la prima documentada. Las empresas con mayor incertidumbre sobre el crecimiento de sus activos (uncertainty of asset growth, UAG) superarían a aquellas con menor incertidumbre sobre el crecimiento de sus activos en un 7% (12%) en rendimiento bruto (ajustado al riesgo) de riesgo excesivo. Estos resultados muestran la importancia de la volatilidad de los factores de riesgo en las decisiones de inversión. En el tercer capítulo, se estudia el impacto que tiene la imprecisión en las expectativas de ganancias de la dirección (management earnings guidance, IMP) sobre los rendimientos del capital. La evidencia empírica revela que unas altas IMP (un mayor intervalo en los ingresos previstos) se asocian a unos rendimientos más bajos de las acciones. Se proporcionan dos explicaciones complementarias para explicar estos bajos rendimientos. Primero, en un mercado que presenta limitaciones a la venta a corto y disparidad de opiniones sobre las estimaciones de beneficios, unas altas IMP desaniman a los inversores pesimistas, mientras que los más optimistas creen en el gran salto de rango y toman posiciones largas en base a estas creencias, lo cual ocasiona sobrevaloraciones de las acciones y, en consecuencia, rentabilidades más bajas. Segundo, unas altas IMP pueden reflejar una verdadera incertidumbre con respecto a las ganancias futuras, y ello puede atraer a los inversores en valor o de lotería. Las conclusiones son sólidas, a nivel de análisis de la cartera y de los valores, para la medición de la imprecisión y para diferentes modelos de fijación de precios de los activos.
This dissertation aims at empirically uncovering new aspects of the cross-section of equity returns and providing theoretical-backed and empirical explanations of the main findings. The dissertation documents novel pricing predictors and factors related to the uncertainty and imprecision levels of the information content embedded in different risk measures. The first chapter investigates whether the time-series volatility of book-to-market (BM), called value uncertainty (UNC), is priced in the cross-section of equity returns. A size-adjusted value-weighted factor with a long (short) position in high-UNC (low-UNC) stocks generates an annualized alpha of 6-8%. This value uncertainty premium is driven by outperformance of high-UNC firms and is not explained by established risk factors or firm characteristics, such as price and earnings momentum, investment, profitability, or BM itself. At the aggregate level, UNC is correlated with macroeconomic fundamentals and predicts future market returns and market volatility. The chapter also provides a rational asset-pricing explanation of the uncovered UNC premium. The second chapter extends the first chapter and examines the predictive power of the uncertainty of profitability (UP) on the cross-section of equity returns. A portfolio strategy that goes long in the high-UP decile portfolio and short in the low-UP decile portfolio generates an annual excess raw (risk-adjusted) return of 8% (10%). High-UP stocks would have higher returns during times of higher market-wide profitability, lower market volatility, and higher expected inflation justifying the documented premium. Moreover, firms with high uncertainty surrounding their asset growth (UAG) would outperform those with low asset growth uncertainty by 7% (12%) in terms of excess raw (risk-adjusted) return. Results shed light on the importance of the volatility of risk factors in investment decisions. The third chapter examines the impact that imprecision in management earnings guidance (IMP) has on equity returns. Empirical evidence reveals that high IMP (wider interval in the forecasted earnings) is associated with lower subsequent stock returns. Two complementary explanations are provided to explain the low returns. First, in a market that exhibits short-selling constraints and diversion of opinion regarding earnings estimates, high IMP discourages pessimistic investors while optimists believe in the high bound of the range and take long positions based on these beliefs, leading to stocks' overpricing and hence to lower subsequent returns. Second, high IMP may reflect genuine uncertainty regarding future earnings appealing to growth and lottery investors. Findings are robust at the portfolio and stock level of analysis, to the measurement of imprecision, and to different asset pricing models.

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This thesis is a collection of essays in empirical finance mainly focused on term structure models. In the first three chapters, we developed methods to extract the yield curve from government and corporate bonds. We measure the performance of such methods in pricing, Value at Risk and forecasting exercises. In its turn, the last chapter brings a discussion about the effects of different metrics of the optimal portfolio on the estimation of a CCAPM model.In the first chapter, we propose a segmented model to deal with the seasonalities appearing in real yield curves. In different markets, the short end of the real yield curve is influenced by seasonalities of the price index that imply a lack of smoothness in this segment. Borrowing from the flexibility of spline models, a B-spline function is used to fit the short end of the yield curve, while the medium and the long end are captured by a parsimonious parametric four-factor exponential model. We illustrate the benefits of the proposed term structure model by estimating real yield curves in one of the biggest government index-linked bond markets in the world. Our model is simultaneously able to fit the yield curve and to provide unbiased Value at Risk estimates for different portfolios of bonds negotiated in this market.Chapter 2 introduces a novel framework for the estimation of corporate bond spreads based on mixture models. The modeling methodology allows us to enhance the informational content used to estimate the firm level term structure by clustering firms together using observable firm characteristics. Our model builds on the previous literature linking firm level characteristics to credit spreads. Specifically, we show that by clustering firms using their observable variables, instead of the traditional matrix pricing (cluster by rating/sector), it is possible to achieve gains of several orders of magnitude in terms of bond pricing. Empirically, we construct a large panel of firm level explanatory variables based on results from a handful of previous research and evaluate their performance in explaining credit spread differences. Relying on panel data regressions we identify the most significant factors driving the credit spreads to include in our term structure model. Using this selected sample, we show that our methodology significantly improves in sample fitting as well as produces reliable out of sample price estimations when compared to the traditional models.Chapter 3 brings the paper “Forecasting the Brazilian Term Structure Using Macroeconomic Factors”, published in Brazilian Review of Econometrics (BRE). This paper studies the forecasting of the Brazilian interest rate term structure using common factors from a wide database of macroeconomic series, from the period of January 2000 to May 2012. Firstly the model proposed by Moench (2008) is implemented, in which the dynamic of the short term interest rate is modeled using a Factor Augmented VAR and the term structure is derived using the restrictions implied by no-arbitrage. Similarly to the original study, this model resulted in better predictive performance when compared to the usual benchmarks, but presented deterioration of the results with increased maturity. To avoid this problem, we proposed that the dynamic of each rate be modeled in conjunction with the macroeconomic factors, thus eliminating the no-arbitrage restrictions. This attempt produced superior forecasting results. Finally, the macro factors were inserted in a parsimonious parametric three-factor exponential model.The last chapter presents the paper “Empirical Selection of Optimal Portfolios and its Influence in the Estimation of Kreps-Porteus Utility Function Parameters”, also published in BRE. This paper investigates the effects on the estimation of parameters related to the elasticity of intertemporal substitution and risk aversion, of the selection of different portfolios to represent the optimal aggregate wealth endogenously derived in equilibrium models with Kreps-Porteus recursive utility. We argue that the usual stock market wide index is not a good portfolio to represent optimal wealth of the representative agent, and we propose as an alternative the portfolio from the Investment Fund Industry. Especially for Brazil, where that industry invests most of its resources in fixed income, the aforementioned substitution of the optimal proxy portfolio caused a significant increase in the risk aversion coefficient and the elasticity of the intertemporal substitution in consumption.

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Segundo Sampaio (2002), os modelos intertemporais de equilíbrio começaram a ter a sua eficácia na determinação do retorno dos ativos questionada após a publicação do artigo de Mehra e Prescott em 1985. Tendo como objeto de análise os dados observados no mercado norte-americano, os autores não foram capazes de reproduzir a média histórica do prêmio do retorno das ações em relação ao retorno dos títulos públicos de curto prazo através de parâmetros comportamentais dentro de intervalos considerados plausíveis. Através das evidências, os autores, então, puderam verificar a necessidade de coeficientes exageradamente altos de aversão ao risco para equiparação do prêmio de risco histórico médio das ações norte-americanas, enigma que ficou conhecido como equity premium puzzle (EPP). Foi possível também a constatação de outro paradoxo: a necessidade de taxas de desconto intertemporais negativas para obtenção da média histórica da taxa de juros, o risk-free rate puzzle (RFP). Este trabalho tem como objetivo adaptar os dados do modelo proposto por Mehra e Prescott (2003) ao mercado brasileiro e notar se os puzzles apresentados anteriormente estão presentes. Testa-se o CCAPM com dados brasileiros entre 1995:1 e 2013:4 adotando preferências do tipo utilidade esperada e através da hipótese de log-normalidade conjunta dos retornos. Utiliza-se o método de calibração para avaliar se há EPP no Brasil. Em linha com alguns trabalhos prévios da literatura nacional, como Cysne (2006) e Soriano (2002) que mostraram a existência do puzzle nos períodos de 1992:1-2004:2 e 1980:1-1998:4, respectivamente, conclui-se que o modelo usado por Mehra e Prescott (2003) não é capaz de gerar o prêmio de risco observado na economia brasileira. Sampaio (2002), Bonomo e Domingues (2002) e Issler e Piqueira (2002), ao contrário, não encontram evidências da existência de um EPP brasileiro.

This thesis consists of three papers that makes independent contributions to the fields of forecast evaluation and financial econometrics. As such, the papers, chapter 1-3, can be read independently of each other. In Chapter 1, “Inferring an agent’s loss function based on a term structure of forecasts”, we provide conditions for identification, estimation and inference of an agent’s loss function based on an observed term structure of point forecasts. The loss function specification is flexible as we allow the preferences to be both asymmetric and to vary non-linearly across the forecast horizon. In addition, we introduce a novel forecast rationality test based on the estimated loss function. We employ the approach to analyse the U.S. Government’s preferences over budget surplus forecast errors. Interestingly, we find that it is relatively more costly for the government to underestimate the budget surplus and that this asymmetry is stronger at long forecast horizons. In Chapter 2, “Monitoring Systemic Risk”, we define systemic risk as the conditional probability of a systemic banking crisis. This conditional probability is modelled in a fixed effect binary response panel-model framework that allows for cross-sectional dependence (e.g. due to contagion effects). In the empirical application we identify several risk factors and it is shown that the level of systemic risk contains a predictable component which varies through time. Furthermore, we illustrate how the forecasts of systemic risk map into dynamic policy thresholds in this framework. Finally, by conducting a pseudo out-of-sample exercise we find that the systemic risk estimates provided reliable early-warning signals ahead of the recent financial crisis for several economies. Finally, in Chapter 3, “Equity Premium Predictability”, we reassess the evidence of out-of- sample equity premium predictability. The empirical finance literature has identified several financial variables that appear to predict the equity premium in-sample. However, Welch & Goyal (2008) find that none of these variables have any predictive power out-of-sample. We show that the equity premium is predictable out-of-sample once you impose certain shrinkage restrictions on the model parameters. The approach is motivated by the observation that many of the proposed financial variables can be characterised as ’weak predictors’ and this suggest that a James-Stein type estimator will provide a substantial risk reduction. The out-of-sample explanatory power is small, but we show that it is, in fact, economically meaningful to an investor with time-invariant risk aversion. Using a shrinkage decomposition we also show that standard combination forecast techniques tends to ’overshrink’ the model parameters leading to suboptimal model forecasts.

The purpose of this thesis is to investigate the evidence of return predictability in equity and treasury markets. The first topic investigates the evidence on return predictability from an economic perspective. We use a simple model that incorporates a time varying investment opportunity set into a mean-variance portfolio maximization framework, and derive the optimal capital allocation weights for: (i) a naive strategy based on average realized returns; and (ii) a class of strategies that condition on dividend-price signals. While our data supports in-sample evidence of return predictability, the out-of-sample returns of the naive strategy are higher than those of all conditional portfolio specifications based on a certainty equivalent metric and portfolio turnover. These results suggest that dividendprice predictability offers no economic value to investors. The second topic studies the link between short and long-run risk premia of equity claims. We extract short-term risk premia from contemporaneous information on short-term futures and cash equity markets under the assumption of no arbitrage. Predictability regressions reveal that short-term risk premia capture different information from long-run risk premia. Counter to the intuition that a high price of risk commands high returns, high short-run risk premia on dividend claims predict low returns on the index. While inconsistent with models featuring either habit persistence or long-run risk, the results may be reconciled with some models of uncertainty aversion. The third topic is concerned with monetary policy sources of bond risk premia. Expected monetary policy shocks are extracted from a panel of inflation, GDP growth, and federal funds rates forecasts and using a Taylor rule specification as an identifying assumption. Expected monetary policy shocks are found to be statistically significant predictors of excess returns on bonds, even after controlling for levels and conditional volatilities of macroeconomic activity. The findings are consistent with a long run risk economy where contractionary monetary policy action increases GDP uncertainty.

The economic utility of sustainability has been a recent domain under scrutiny by several academicians. More specifically, researchers have investigated the positive effects of sustainability reporting on firms from different angles. One of these angles is sustainability’s effect on firms’ prestige in the market, which is inevitably connected to market indicators, such as, risks and returns. Consequently, this research paper is positioned as a complement to previous researchers’ work within the field of sustainability reporting and its positive effects on firms. This paper’s foremost aspiration is to fill a knowledge gap in research by finding empirical evidence whether the first time assurance on sustainability reports causes a lower subsequent cost of equity capital. For this matter, the researchers’ methodology was deductive in nature, which relied on investigating established theories that are connected to the two dimensions of the research question; cost of equity capital and assurance on sustainability reports. This investigation formed the researchers’ theoretical schemata upon which they both neglected certain theories in favour of others and formed a verifiable theoretical research hypothesis. In this research, Sweden, a country known for its dedication for sustainability, was chosen as a market from which a sample was collected. The researchers conducted their study in a panel format where the same information about 44 different companies was collected on several years. Due to the fact that the number of listed firms that had been reporting their sustainability reports was quite moderate, a census study was convenient and applicable. The researchers ended up with a sample of 44 firms that constituted 352 observations, which formed the basis for the statistical inference. The empirical study employed several regression models of panels to reach the most representative model that fitted the data in hand. Also, to guarantee higher quality results the fitted model, the Two- way Error Component Fixed-effects Model, was tested for heteroskedasticity, cross- sectional correlation, autocorrelation and non-stationarity. This model revealed a relatively low explanatory power that drove the researchers to interpret their statistical findings with great caution. At a specific level of statistical significance, the regression model revealed a significant correlation between assurance on sustainability reports and a subsequent lower cost of equity capital. This result was refuted at higher levels of significance. Thus, the researchers were able to answer the research question affirmatively, to a certain extent, and to demonstrate that the research’s results verify the underpinnings of neo-institutional and signalling theories.

The work is focussed on the determination of capital structure in its market values, determination of the cost of non-own capital, and determination of the cost of equity, primarily by using the CAPM method. In terms of the CAPM procedure the work deals with the main parameters required by the method, such as risk-free yield rate, risk market premium, and beta coefficient. Furthermore, attention is given to modifications resulting from the inaccuracies of the CAPM method to make the method correspond as much as possible with the actual yield and risk of shares historically achieved at the capital market, and likewise to modifications needed when applying the CAPM method to the valuation of Czech businesses. The recommended procedure of determining the market discount rate for the valuation of an enterprise is applied on an example. Data obtained from the capital market of the Czech Republic are used to calculate the risk premium of the Czech capital market and beta coefficient of selected ten shares out of the Czech capital market, giving an assessment of the possibility of using the data obtained from the Czech capital market for the valuation of businesses incorporated in the Czech Republic.

The thesis consists of four chapters. The introductory chapter clarifies different notions of rationality used by economists and gives a summary of the remainder of the thesis. Chapter 2 proposes an explanation for the common empirical observation of the coexistence of infrequently-changing regular price ceilings and promotion-like price patterns. The results derive from enriching an otherwise standard, albeit stylized, general equilibrium model with two elements. First, the consumer-producer interaction is modeled in the spirit of the price dispersion literature, by introducing oligopolistic markets, consumer search costs and heterogeneity. Second, consumers are assumed to be boundedly-rational: In order to incorporate new information about the general price level, they have to incur a small cognitive cost. The decision whether to re-optimize or act according to the obsolete knowledge about prices is itself a result of optimization. It is shown that in this economy, individual retail prices are capped below the monopoly price, but are otherwise flexible. Moreover, they have the following three properties: 1) An individual price has a positive probability of being equal to the ceiling. 2) Prices have a tendency to fall below the ceiling and then be reset back to the cap value. 3) The ceiling remains constant for extended time intervals even when the mean rate of inflation is positive. Properties 1) and 2) can be associated with promotions and properties 1) and 3) imply the emergence of nominal price rigidity. The results do not rely on any type of direct costs of price adjustment. Instead, price stickiness derives from frictions on the consumers’ side of the market, in line with the results of several managerial surveys. It is shown that the developed theory, compared to the classic menu costs-based approach, does better in matching the stylized facts about the reaction of individual prices to inflation. In terms of quantitative assessment, the model, when calibrated to realistic parameter values, produces median price ceiling durations that match values reported in empirical studies.

The starting point of the essay in Chapter 3 is the observation that the baseline New-Keynesian model, which relies solely on the notion of infrequent price adjustment, cannot account for the observed degree of inflation sluggishness. Therefore, it is a common practice among macro- modelers to introduce an ad hoc additional source of persistence to their models, by assuming that price setters, when adjusting a price of their product, do not set it equal to its unobserved individual optimal level, but instead catch up with the optimal price only gradually. In the paper, a model of incomplete adjustment is built which allows for explicitly testing whether price-setters adjust to the shocks to the unobserved optimal price only gradually and, if so, measure the speed of the catching up process. According to the author, a similar test has not been performed before. It is found that new prices do not generally match their estimated optimal level. However, only in some sectors, e.g. for some industrial goods and services, prices adjust to this level gradually, which should add to the aggregate inflation sluggishness. In other sectors, particularly food, price-setters seem to overreact to shocks, with new prices overshooting the optimal level. These sectors are likely to contribute to decreasing the aggregate inflation sluggishness. Overall, these findings are consistent with the view that price-setters are boundedly-rational. However, they do not provide clear-cut support for the existence of an additional source of inflation persistence due to gradual individual price adjustment. Instead, they suggest that general equilibrium macroeconomic models may need to include at least two types of production sectors, characterized by a contrasting behavior of price-setters. An additional finding stemming from this work is that the idiosyncratic component of the optimal individual price is well approximated by a random walk. This is in line with the assumptions maintained in most of the theoretical literature.

Chapter 4 of the thesis has been co-authored by Julia Lendvai. In this paper a full-fledged production economy model with Kahneman and Tversky’s Prospect Theory features is constructed. The agents’ objective function is assumed to be a weighted sum of the usual utility over consumption and leisure and the utility over relative changes of agents’ wealth. It is also assumed that agents are loss-averse: They are more sensitive to wealth losses than to gains. Apart from the changes in the utility, the model is set-up in a standard Real Business Cycle framework. The authors study prices of stocks and risk-free bonds in this economy. Their work shows that under plausible parameterizations of the objective function, the model is able to explain a wide set of unconditional asset return moments, including the mean return on risk-free bonds, equity premium and the Sharpe Ratio. When the degree of loss aversion in the model is additionally assumed to be state-dependent, the model also produces countercyclical risk premia. This helps it match an array of conditional moments and in particular the predictability pattern of stock returns.
Doctorat en Sciences économiques et de gestion
info:eu-repo/semantics/nonPublished

This dissertation presents three essays on asset pricing and econometrics. The first chapter identifies rare events and long-run risks simultaneously from a rich data set (the Barro-Ursua macroeconomic data set) and evaluates their contributions to asset pricing in a unified framework. The proposed model of rare events and long-run risks is estimated using a Bayesian Markov-chain Monte-Carlo method, and the estimates for the disaster process are closer to the data than those in the previous studies. Major evaluation results in asset pricing include: (1) for the unleveraged annual equity premium, the predicted values are 4.8%, 4.2%, and 1.0%, respectively; (2) for the Sharpe ratio, the values are 0.72, 0.66, and 0.15, respectively.
Economics

Diploma thesis covers the topic about different attitudes to DCF valuation. The first part is an introduction into CAPM theory and a multifactor French-Fama model. This part also indicates different views on financial assets and analyzes an issue of setting discount rates, especially the risk-free rate and equity risk premium. The second part of this paper applies the theory into valuation of Microsoft, GAP and Telefónica O2. There are elaborated forecasts of the financial statements and free cash flows (FCFCE, FCFU), the discount rate composition and analyses of the factors HML and SMB. At the end, there are performed various valuations, which results are discussed together with a development of real market prices.

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O objetivo deste trabalho é analisar a alocação de investimentos no mercado acionário brasileiro, utilizando a teoria do prospecto de Tversky e Kahneman (1979) e o conceito de Aversão a Perdas Míope (Myopic Loss Aversion) proposto por Benartzi e Thaler (1995). Foram levantados através de experimento de laboratório os parâmetros da função de valor e da função de ponderação de probabilidades da teoria do prospecto e foi verificada a alocação de investimentos entre ações e renda fixa que maximizam a utilidade. Chegamos à conclusão que o total de recursos atualmente direcionados ao mercado de ações no Brasil, que é de aproximadamente 2,7% para pessoas físicas e de 6,0% para pessoas jurídicas, é compatível com a teoria do prospecto.
The objective of this study is to analyze the investment allocation in the Brazilian stock market, using Tversky and Kahneman’s prospect theory (1979) and the concept of myopic loss aversion proposed by Benartzi and Thaler (1995). We run a laboratory experiment to obtain the parameters of the value function and the probability weighting function of the prospect theory and identify the allocation that maximizes utility in the Brazilian Market We conclude that the actual allocation of investment in the stock market, of around 2.7% for individuals and around 6% for all the segments, is in accordance with the prospect theory.

Thesis (M. Fin.)--Massachusetts Institute of Technology, Sloan School of Management, Master of Finance Program, 2011.
Cataloged from PDF version of thesis.
Includes bibliographical references (p. 31).
Recessions are an inherent part of economic cycles. During the last decade we have experienced two extended periods of significant economic slowdown accompanied by major downturns in most of the asset classes and especially in equities. Investors during recessions suffer from severe losses and diversification does not provide the optimal solution. Through the development of an econometric model for dynamic management of recession risk in equity portfolios based on an empirical measure of timevarying recession risk, I plan to estimate cross-sectional differences in recession risk exposure among equities and associated differences in risk premia. The analysis is expanded on an industry level, where among industries clear patterns are identified in terms recession risk exposure. In the last part of the report I explore the possibility of creating a trading strategy which is able to generate significant performance benefiting from the market underreaction to recession risk.
by Kyriakos Chousakos.
M.Fin.

One of the most popular investment and trading strategies over the last decade, has been the currency carry trade, which allows traders and investors to buy high-yielding currencies in the Foreign Exchange spot market by borrowing, low or zero interest rate currencies in the form of pairs, such as the Australian Dollar/Japanese Yen (AUD/JPY), with the purpose of investing the proceeds afterwards into fixed-income securities.To be able to determine the causality between the returns of equity markets and the foreign exchange market, we choose to observe the sensitivity and influence of two equity indexes on several pairs involved in carry trading. The reason for studying these relationships is to further explain the causes of the uncovered interest parity puzzle, thus adding our contribution to the academic field through this thesis.To accomplish our goals, data was gathered for daily quotes of 16 different currency pairs, grouped by interest differentials, and two equity indexes, the S&P 500 and FTSE All-World, along with data for the VIX volatility index, for the 2003-2012 period. The data was collected from Thomson Reuters Datastream and the selected ten year span was divided into three different periods. This was done in order to discover the differences on how equity indexes relate to typical carry trade currency pairs, depending on market developments before, during and after the world financial crisis.The tests conducted on the collected data measured the correlations, influences and sensitivity for the 16 different currency pairs with the S&P 500 Index, the FTSE All-World index, and the volatility index between the years of 2003-2012. For influences and sensitivity, we performed Maximum Likelihood (ML) regressions with Generalized Autoregressive Conditional Heteroscedasticity (GARCH) [1,1], in Eviews software.After analyzing the results, we found that, during our chosen time period, the majority of currency pair daily returns are positively correlated with the equity indexes and that the FX pairs show greater correlation with the FTSE All-World, than with the S&P 500. Factors such as the interest rate of a currency and the choice of funding currency played an important role in the foreign exchange markets, during the ten year time span, for every yield group of FX pairs.Regarding the influence and sensitivity between currency pairs and the S&P 500 with its VIX index, we found that our models explanatory power seems to be stronger when the interest rate differential between the currency pairs is smaller. Our regression analysis also uncovered that the characteristics of an individual currency can show noticeable effects for the relationship between its pair and the two indexes.

Examinations of long-run trends in the stock market usually concentrate on markets in the United States. This paper builds on these studies by examining the equity risk premium in Canada over the 1923-2001 period. Two methodologies are used to gauge the expectations of investors with regard to the equity risk premium. The first is the one developed and implemented by Arnott and Bernstein (2002) for the United States. The second methodology estimates the equity risk premium implicit in the discount rate that equates forecasted dividend payments to present market valuations. The empirical results show that actual risk premiums either met or exceeded the future equity risk premium expectations of Canadian investors over the studied time period. On balance, it would appear that investors realized more than they expected in terms of risk premium over the studied period, although this excess does not appear to be as pronounced as that found by Arnott and Bernstein (2002) for the United States. Moreover, evidence is presented that the effect of the stock exchange (namely, the Toronto Stock Exchange and Montreal Exchange) used to measure stock returns is important when investors form their expectations regarding future equity premiums. However, the latter result may be due to the lower quality of the data available for the Montreal Exchange.

碩士
國立高雄第一科技大學
財務管理所
98
Risk and return has been the core of the discussion of financial and economic theory. From the point of view on consumption-based asset pricing theory, Mehra and Prescott (1985) studies induce a conflict between empirical evidence and consumption-based theories and form the so-called “Equity Premium Puzzle”. This research investigates the equity premium from fundamentals and uses GARCH Model to research the equity premium of Taiwan’s stock market during the period from 1962 to 2004. The results show the equity premium and the market prices of risk are time-varying. Our thesis also found that the risk premium in Taiwan is contrary to the viewpoint of Fame and French (2002). In contrast of the evidences of Fame and French , the average realized return, 18.52 percent, in Taiwan from 1962-2004 is about twice than of U.S., 9.62 percent from 1951-2000. The similar results could also be found in the realized risk premium, 15.86 percent in Taiwan and 7.43 percent in U.S.. But our results show more large values of the expected risk premiums from dividends and earnings growth models. In U.S., the average risk premium of dividends and earning models are just about 2.55 and 4.32 percent, respectively. Estimated value of risk premiums from the fundamentals suggested by Fame and French(2002) to explain the equity premium puzzle seemly deeps the puzzle in Taiwan.