Abstract

http://ssrn.com/abstract=298238
 
 

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Market Efficiency, Asset Returns, and the Size of the Risk Premium in Global Equity Markets


Ravi Bansal


Duke University and NBER

Christian T. Lundblad


University of North Carolina Kenan-Flagler Business School

January 2002


Abstract:     
An important economic insight is that observed equity prices must equal the present value of the cash flows associated with the equity claim. An implication of this insight is that present values of cash flows must also quantitatively justify the observed volatility and cross-correlations of asset returns. In this paper, we show that parametric economic models for present values can indeed account for the observed high ex-post return volatility and cross-correlation observed across five major equity markets. We present evidence that cash flow growth rates contain a small predictable long-run component; this feature, in conjunction with time-varying systematic risk, can justify key empirical characteristics of observed equity prices. In many cases, our model can also capture observed equity price levels. Our evidence suggests that the ex-ante risk premium on the global market portfolio has dropped considerably - we show that this fall in the risk premium is related to a decline in the conditional variance of global real cash flow growth rates.

Number of Pages in PDF File: 54

Keywords: Asset volatility, Correlation, Cash Flows, Risk Premia, Fundamental Values

JEL Classification: F3, G0, C1, C5

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Date posted: January 30, 2002  

Suggested Citation

Bansal, Ravi and Lundblad, Christian T., Market Efficiency, Asset Returns, and the Size of the Risk Premium in Global Equity Markets (January 2002). Available at SSRN: http://ssrn.com/abstract=298238 or http://dx.doi.org/10.2139/ssrn.298238

Contact Information

Ravi Bansal
Duke University and NBER ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)
Christian T. Lundblad (Contact Author)
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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