Equity premia and state-dependent risks

Capturing Equity Risk Premia

Tail Risk and Equity Risk Premia

This paper develops a new semi-parametric estimation method based on an extended ICAPM dynamic model incorporating jump tails. Themodel allows for time-varying, asymmetric jumpsizedistributions and a self-exciting jump intensity process while avoiding commonly used but restrictive affine assumptions on the relationship between jump intensity andvolatility. The estimatedmodel implies that the av...

Filtering Equity Risk Premia from Derivative Prices

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

Catastrophe Aversion and Risk Equity under Dependent Risks

Catastrophe aversion and risk equity are important concepts in both risk management theory and practice. Keeney (1980) was the first to formally define these concepts. He demonstrated that the two concepts are always in conflict. Yet this result is based on the assumption that individual risks are independent and has thus limited relevance for real world catastrophic events. We extend Keeney’s ...

High Equity Premia and Crash Fears. Rational Foundations

We show that when in Lucas trees model the process for dividends is described by a lattice tree subject to infrequent but observable structural breaks, in equilibrium recursive rational learning may inßate the equity risk premium and reduce the risk-free interest rate for low levels of risk aversion. The key condition for these results to obtain is the presence of sufficient initial pessimism. ...