Stock Market Risk Premia: The Perspective of Financial Analysts

Abstract

We examine the time-series and cross-section of stock market risk premia from the perspective of financial analysts. Our novel approach is based on the notion that analysts' stock recommendations reflect both their subjective return expectations and their perceived stock risk. Thus, we can empirically infer presumed risk premia from recommendations and target price implied expected returns. In the time-series, analysts' presumed risk premia are countercyclical and strongly correlated with option-based estimates of the equity premium. In the cross-section, the presumed risk premia are comparably large for high-beta, small, and value stocks, lending support to a risk-based interpretation of these characteristics.

Keywords: Risk Premia, Subjective Return Expectations, Financial Analysts, Equity Premium

JEL Classification: G11, G12