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Equity Risk Premium and Future Economic Growth: A Reexamination - L’equity risk premium e la crescita economica futura: un riesame

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This study analyzes equity risk premium, that is the incremental return over and above the return on risk free securities for assuming the risk. Using GARCH estimate reveals strong positive correlation between growth rate of GDP and that of the equity risk premium. An increase in future economic activity as measured by rising growth rate of GDP enhances equity premium in the current period. Rising future economic activity translates into an increasing return on the risky assets. As investors attempt to swap less risky assets and Treasury securities for risky assets such as stocks, the degree of openness has increased over time in the global economy. This increased the flow of goods and services to and from other economies and substantially accelerated the competition as well as the efficiency of intermediation. The increase in competition and efficiency of intermediation is theoretically expected to increase profit margin for global corporations, which in turn raises the return on equity. There appears to be no relationship between the equity premium and the degree of openness. - Questo studio analizza l’equity risk premium, cioè il rendimento addizionale richiesto per l’investimento azionario rispetto agli investimenti privi di rischio. Tramite l’utilizzo di stime GARCH si evidenziano correlazioni fortemente positive tra il tasso di crescita del PIL e quello dell’equity risk premium. Un incremento futuro dell’attività economica, stimato sulla base di un tasso di crescita del PIL in aumento, accresce l’equity premium nel periodo corrente. Un futuro aumento dell’attività economica corrisponderà ad un aumento di reddito delle attività a rischio. Poiché gli investitori tendono a scambiare titoli a basso rischio e titoli di stato con titoli azionari, il grado di apertura dei mercati è cresciuto con la globalizzazione dell’economia. Ciò ha fatto aumentare i flussi di beni e servizi tra le diverse economie ed ha accelerato in misura sostanziale la competitività e l’efficienza della intermediazione. Questa maggiore competitività ed efficienza potrebbe in teoria far aumentare i margini di profitto per gli investitori globali e di conseguenza far crescere i rendimenti azionari, mentre non risulta alcuna relazione tra l’equity risk premium e il grado di apertura dei mercati.

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  • Homaifar, Ghassem A. & Salimullah, Abul Hasnat Muhammed, 2014. "Equity Risk Premium and Future Economic Growth: A Reexamination - L’equity risk premium e la crescita economica futura: un riesame," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 67(3), pages 373-385.
    • Handle: RePEc:ris:ecoint:0725
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    More about this item

    Keywords

    Equity Risk Premium; Growth Rate of GDP; Degree of Openness;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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