A Scenario Analysis of the Risk Premium in G7 Countries
International Journal of Theoretical and Applied Finance, Vol. 11, No. 7, pp. 673-689, 2008
17 Pages Posted: 2 Dec 2009 Last revised: 31 Dec 2009
Date Written: November 1, 2008
In this investigation over 144,000 simulations are undertaken of country equity risk premia, based on a scenario analysis of the uncertainty surrounding the period of non-sustainable growth in earnings and stock returns. Final estimates, from the larger data-sets in Japan, the US and the UK, are around 3-6% in nominal terms, and compare well with other methodologies. However, except for Canada, the smaller data-sets in France, Germany and Italy reveal much higher risk premia than expected. Furthermore, given the spreads in estimates generally, the issue of sustainability is still contentious.
Keywords: Risk premium, growth, G7, earnings, returns
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