tag:blogger.com,1999:blog-8152901575140311047.post5360407426140041709..comments2024-03-29T05:33:33.027-04:00Comments on Musings on Markets: Reversal in Risk Premiums (or premia): The 2010 storyAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-8152901575140311047.post-33278393603490804812010-11-29T22:31:54.035-05:002010-11-29T22:31:54.035-05:00Sorry, but you cannot evaluate market risk premium...Sorry, but you cannot evaluate market risk premium in this way. You would have to know investors are predicting about the economy as a whole and the long-term direction of the stock market. <br /><br />Market risk premium is only one factor in a stock's valuation. An investor's expectations of future cash flows is another. I may have the same risk tolerance the whole time (and hence the same market risk premium), but if I see news showing the recession is going to last much longer, then the valuation of my stocks drops as well.<br /><br />Simply plugging in market valuations and dividends does not yield a market risk premium.Eric Fleethttps://www.blogger.com/profile/01778293879130305742noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-7202901251872701752010-01-19T14:51:07.463-05:002010-01-19T14:51:07.463-05:00Unlike Professor Shiller, I don't think hybrid...Unlike Professor Shiller, I don't think hybrid securities will provide a solution to the fundamental mismatches between inflow and outflow that bedevil all human beings (and thus create risk).<br /><br />I do find it interesting, though, that Professor Shiller, with his strong views on market irrationality and exuberance, is such a strong proponent of a market-based solution.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-48411242855372950052010-01-19T01:12:20.351-05:002010-01-19T01:12:20.351-05:00Prof,
I wanted to know your thoughts on a recent ...Prof,<br /><br />I wanted to know your thoughts on a recent article by Prof.Shiller in which he talks abt Hybrid securities as a solution for avoiding future credit crisis like the one we witnessed last year.<br /><br />http://www.project-syndicate.org/commentary/shiller69 <br /><br />"Regulatory hybrid securities would raise the cost of capital to banks (because creditors would have to be compensated for the conversion feature), whereas the banks would rather rely on their “too big to fail” status and future government bailouts. " - Is this as simple as it sounds?Mahesh Sethuramanhttps://www.blogger.com/profile/01909074683189926487noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-26762423335876709902010-01-18T06:57:30.309-05:002010-01-18T06:57:30.309-05:00Hi Prof,
While on the topic of ERPs and their tre...Hi Prof,<br /><br />While on the topic of ERPs and their trends, I wanted to know your thoughts on the Equity Premium Puzzle. http://en.wikipedia.org/wiki/Equity_premium_puzzle<br /><br />For one, I didn't understand what the puzzle exactly was. Secondly, I am not sure if the solutions proposed to explain the puzzle, are not in violation of empirically proven laws of risk and return. However, I found the topic to be very contentious among the academic community and so had to know your take on it. <br /><br />Hope you oblige!perpetual wondererhttps://www.blogger.com/profile/12795860415528166734noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-67154054567557007552010-01-14T09:49:19.639-05:002010-01-14T09:49:19.639-05:00As I mentioned in the post, I don't know. It c...As I mentioned in the post, I don't know. It could be that markets over reacted in later 2008 to a banking problem or that they are under reacting now to a changed risk environment. This year should deliver some answers.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-70734335287308780102010-01-14T08:12:14.833-05:002010-01-14T08:12:14.833-05:00Prof,
When you say that the risk premiums reversi...Prof,<br /><br />When you say that the risk premiums reversing so quickly could indicate a market in denial, isn't the reverse possible too? Could the market have been overly skeptic after the September of 2K8? Because if you look at things very fundamentally, the crisis was really a financial markets crisis rather than an economic downturn (with demand or supply levels for any conceived basket of goods not as alarmingly out of sync). So default spreads and sovereign risk premiums (mainly for emerging markets) probably climbed much higher than they would have, had the markets been able to discern between the real business growth potential and the potential for making money purely in the financial markets.<br /><br />Could this be true? Because then, risk premiums reversing so quickly only proves that the efficient market hypothesis has prevailed, eventually, after a 15 month period.<br /><br />Am I making any sense?perpetual wondererhttps://www.blogger.com/profile/12795860415528166734noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-30011029125470797072010-01-14T00:54:10.893-05:002010-01-14T00:54:10.893-05:00This comment has been removed by the author.perpetual wondererhttps://www.blogger.com/profile/12795860415528166734noreply@blogger.com