Market Risk Premium - Definition
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Academic Research on Market Risk Premium Resolving the puzzling intertemporal relation between themarket risk premiumand conditional market variance: A twofactor approach, Scruggs, J. T. (1998). The Journal of Finance,53(2), 575-603. The existing empirical literature fails to agree on the nature of the intertemporal relation between risk and return. This paper attempts to resolve the issue by estimating a conditional two-factor model motivated by Merton's intertemporal capital asset pricing model. The paper also helps explain the convoluted empirical relation between the market risk premium, conditional market variance, and the nominal risk-free rate previously reported in the literature. Asset pricing, higher moments, and themarket risk premium: A note, Sears, R. S. (1985). The Journal of Finance,40(4), 1251-1253. This paper provides an introduction to alternative models of uncertain commodity prices. The accuracy of the valuation is in part dependent on the quality of the engine employed. This paper provides an overview of several basic commodity price models and explains the essential differences among them. It also shows how futures prices can be used to discriminate among the models and to estimate better key parameters of the model chosen. Pricing forward contracts in power markets by the certainty equivalence principle: explaining the sign of themarket risk premium, Benth, F. E., Cartea, ., & Kiesel, R. (2008). Journal of Banking & Finance,32(10), 2006-2021. This paper provides a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players and the interaction between buyers and sellers. The authors show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium. Themarket risk premium: Expectational estimates using analysts' forecasts, Harris, R. S., & Marston, F. C. (1999). In this paper, the authors use expectational date from financial analysts to estimate a market risk premium for U.S. stocks. Using the SP500 as a proxy for the market portfolio, this paper finds an average market risk premium of 7.14% above yields on long-term U.S. government bonds over the period of 1982-1998. It also finds that risk premium varies over time and that much of this variation can be explained by either the level of interest rates or readily available forward-looking proxies for risk. Marketrisk premiumused in 56 countries in 2011: A survey with 6,014 answers, Fernandez, P., Aguirreamalloa, J., & Avendao, L. (2011). This paper contains the statistics of the Equity Premium or Market Risk Premium (MRP) used in 2011 for 56 countries. Although the authors have answers for 85 countries, this paper only reports the results for 56 countries with more than 6 answers. The paper also contains the references used to justify the MRP, comments from persons that do not use MRP, and comments from persons that do use MRP. Estimating themarket risk premium, Mayfield, E. S. (2004).Journal of Financial Economics,73(3), 465-496. This paper provides a method for estimating the market risk premium that accounts for shifts in investment opportunities by explicitly modeling the underlying process governing the level of market volatility. This paper shows that approximately 50% of the measured risk premium is related to the risk of future changes in investment opportunities. Time-varying conditional skewness and themarket risk premium., Harvey, C. R., & Siddique, A. (2000). Research in Banking and Finance,1(1), 27-60. This paper presents an asset pricing model where skewness is priced. Evidence from this paper provides significant time-variation in conditional skewness measures for both the US stock market and a broader world market portfolio. The paper estimates the price of skewness risk and show that this asset pricing model can account for much of the time series variation in the expected market risk premium. It also finds that this model helps explain many of the episodes of negative ex ante market risk premiums. Market Risk Premiumused in 88 countries in 2014: a survey with 8,228 answers, Fernandez, P., Linares, P., & Fernndez Acn, I. (2014). This paper contains the statistics of the Equity Premium or Market Risk Premium (MRP) used in 2014 for 88 countries. The paper also contains the references used to justify the MRP, comments from 30 persons that do not use MRP, and comments from 53 persons that do use MRP. Market Risk Premiumand Risk Free Rate used for 51 countries in 2013: a survey with 6,237 answers, Fernandez, P., Aguirreamalloa, J., & Linares, P. (2013). This paper contains the statistics of the Risk-Free Rate and of the Equity Premium or Market Risk Premium (MRP) used in 2013 for 51 countries. The paper also contains the Risk-Free rate used, comments from persons that do not use MRP, and comments from persons that do use MRP. Forward-lookingmarket risk premium, Duan, J. C., & Zhang, W. (2013). Management Science,60(2), 521-538. A method for computing forward-looking market risk premium is developed in this paper. The paper comes up with a theoretical expression that links forward-looking risk premium to investors' risk aversion and forward-looking volatility, skewness, and kurtosis of cumulative return. Market Risk Premiumused in 2010 by Analysts and Companies: a survey with 2,400 answers, Fernandez, P., & del Campo Baonza, J. (2010). This paper shows the MRP used in more than 20 countries and the MRP used in 2009. The paper also contains the references that analysts and companies use to justify their MRP, and comments from 89 respondents that illustrate the various interpretations of what is the required MRP. Relationship between franking credits and themarket risk premium, Gray, S., & Hall, J. (2006). Accounting & Finance,46(3), 405-428. In this paper, the authors explicitly derive the relationship between the value of franking credits (gamma) and the market risk premium (MRP). The study shows that the standard parameter estimates that have been adopted in practice (especially by Australian regulators) violate this deterministic mathematical relationship. It also show how information on dividend yields and effective tax rates bounds the values that can be reasonably used for gamma and the MRP.