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Implied Economic Risk Premiums

Posted: 30 Jul 2013 Last revised: 14 Nov 2015

Haitao Mo

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

Date Written: 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.

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

Suggested Citation

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

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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