Explaining Equity Risk Premium during Financial Crises

25 Pages Posted: 22 Aug 2013 Last revised: 31 Aug 2013

See all articles by Ming-Hsien Chen

Ming-Hsien Chen

National Kaohsiung First University of Science & Technology

Chun I. Lee

Loyola Marymount University - Department of Finance and Computer Information Systems

Vivian W. Tai

National Chi Nan University

Date Written: August 20, 2013

Abstract

This paper investigates the dynamics among three non-equity factors, credit, illiquidity, and foreign exchange risks, and equity returns to explore the equity risk premium. Results from both VAR and EGARCHM models demonstrate that credit and liquidity risk premia and changes in exchange rates explain equity returns in Germany, Japan, the United Kingdom, and the United States during recent financial crises. More importantly, the traditional measure of the equity market risk premium ceases to be significant in explaining equity returns when these three non-equity factors are included in the model. Although its explaining power is significant in the US, its significant level is lower. Our results offer convincing evidence that these three non-equity factors explain the equity risk premium during financial crises.

Keywords: LIBOR-OIS Spread, CDS, USDX, Exchange Rates, Equity Risk Premia

JEL Classification: E51, F31, G12

Suggested Citation

Chen, Ming-Hsien and Lee, Chun I. and Tai, Vivian W., Explaining Equity Risk Premium during Financial Crises (August 20, 2013). Available at SSRN: https://ssrn.com/abstract=2313664 or http://dx.doi.org/10.2139/ssrn.2313664

Ming-Hsien Chen (Contact Author)

National Kaohsiung First University of Science & Technology ( email )

2 Jhuoyue Rd.
Nanzih
Kaohsiung City, Taiwan 811
Taiwan

HOME PAGE: http://www2.nkfust.edu.tw/~mhchen/

Chun I. Lee

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

Vivian W. Tai

National Chi Nan University ( email )

Nantou
Taiwan

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