Abstract

http://ssrn.com/abstract=2302872
 
 

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Implied Economic Risk Premiums


Haitao Mo


E. J. Ourso College of Business, Louisiana State University

February 13, 2014


Abstract:     
The literature on economic risk premiums has largely been based on ex post returns. I construct implied ex ante risk premiums for a list of economic factors, using direct expected returns estimates --- i.e., the implied costs of capital (ICCs). For most factors, ICCs support significant nonzero average economic risk premiums which ex post returns fail to uncover, implying many factors are actually priced from an ex ante perspective. The implied factor risk premiums are powerful predictors for the future ex post returns of mimicking portfolios for many economic factors (e.g., value and size factors, default spread, inflation, the growth rate of labor income, and one-month T-bill real return), both in sample and out of sample. Time-varying ex ante economic risk premiums are significantly suggested by ICCs.

Number of Pages in PDF File: 70

Keywords: economic risk premiums, factor risk premiums, implied costs of capital, factor mimicking portfolios, factor pricing, time-series predictability, ex ante perspective, time-variant risk premiums

JEL Classification: G12, G14

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Date posted: July 30, 2013 ; Last revised: February 15, 2014

Suggested Citation

Mo, Haitao, Implied Economic Risk Premiums (February 13, 2014). Available at SSRN: http://ssrn.com/abstract=2302872 or http://dx.doi.org/10.2139/ssrn.2302872

Contact Information

Haitao Mo (Contact Author)
E. J. Ourso College of Business, Louisiana State University ( email )
E. J. Ourso College of Business
Louisiana State University
Baton Rouge, LA 70803
United States
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