US Risk Premia under Emerging Markets Constraints

22 Pages Posted: 9 Jun 2020

See all articles by Elias Cavalcante Filho

Elias Cavalcante Filho

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Rodrigo De-Losso

University of São Paulo (USP) - Department of Economics

Bruno Giovannetti

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Date Written: May 14, 2020

Abstract

USA market is the benchmark for empirical finance and considered the closest example of how an efficient market should behave. On the other hand, divergent results from the observed in the USA are often associated with unreliable and due deviations from efficient hypothesis. However, how would the US market results behave had the data the same constraints as an emerging market economy? To answer that question we analyze the risk premia market estimation under the typical constraints from emerging equity markets: the small number of assets and the short time-series sample available for estimation. We use parameters of time-series length, number of assets and accounting variables distribution from the Brazilian equity market. Surprisingly, we conclude that the US market risk premia convey the same data features as the Brazilian risk premia if under the same time constraints. Then, we evaluate two potential causes of problems in risk premia estimations with small T: i) small sample bias on betas, and ii) divergence between ex-post and ex-ante risk premia. Through Monte Carlo simulations, we conclude that for the T around 5 years the beta estimates are no longer a problem. However, it is necessary to analyze a time-series sample exceeding 40 years to obtain robust ex-ante risk premia.

Keywords: Equity Risk premia, Asset pricing, Multi-factor model

JEL Classification: G12, G17

Suggested Citation

Cavalcante Filho, Elias and Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, US Risk Premia under Emerging Markets Constraints (May 14, 2020). Available at SSRN: https://ssrn.com/abstract=3600947 or http://dx.doi.org/10.2139/ssrn.3600947

Elias Cavalcante Filho (Contact Author)

( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-900
Brazil

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://sites.google.com/site/fchague/

Rodrigo De-Losso

University of São Paulo (USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-010
Brazil
551130930957 (Phone)

Bruno Giovannetti

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
18
Abstract Views
167
PlumX Metrics