"-'.,. C'-.-".'-:-~-'-'--'---='- "--'M"'OCC", -'~~~-\. .c- c., ,--,,;.=,-~. '.' .,... ..,. ~~-.'. .'..' L'_o.;.:,o {;o:~~:~ fj: ~~;:o::o;o .: "0 [:::':'::0 r"OO !!oo:;oo:o ::':0 . ~':;;: ~o ,: ;. .." ". "" Rop.ert s. H~ms :~n9 Felicia C. Mat~ton <!s!ng .e,':P~~/.~t{f1'IJaJ ,ila~ti fi.lj.m.fij!~tl'r,;jEt h}ltT{'v,,;~~~ i,.'e '~..stlr.'1il!,: Q iritJioki:j.1-7sk'pi'i.!CJJ{ilfil fur U..; $ldckof. isj(,uto;4':!o~ t 1.f%:isbovL' rafJl's ,\;feld$ Q...etJJIJIe:: OJ} J o-:zg.-~i?r"i(I "tr'"S:¥fI )o~rl!!JTe.lJj':bQlid~ mUt:1r tifth1o~ '1:°'rI;iq(i?!~~pn t~,..~~laQl~fa!11'?z1!#::-'Pt?,1;fhg pr:o,t:i.t:..I:I:rj!.~k- g(J\!efl7m~~/.fl!i.c'ft"sr $~gg#ij~:~I~?:.~te!J.~i!:(!d tuili:f io?1!;r:,tl1!!l11~~!\le."j:IJ!f];;: 1J~.J.f;.1?1 !1li(r.olJ1il: pctiod be.~h1i~It!.;J 'f!~if..j!)qi:litJ/:::ri~k Ilfeini!lfn:. "~/~rn.~ .. 1:9~~1' t' 99~ by C.lt};!?': thY! '~rel upr1e(l!,~ bh '$/o"k.v';Ct('- T~i~ 1'i~pr~{11 (ljinr..rejo! IO..t~tI\.,t' Ii/ore i~m 1'i1~.f4lor'r.'!.it4;i7j' ini'ef:£f!l.v .sillhl.. lhan wiin i-"Jer~".I'1 .'.. "O' ., -' ~.rLi,~ ~Q~t!o'li,Qr;~ :);I1.BI:}F~t: ris~ pte!"'l1~~m,i(~~:e.sp.r~~~, O';,O: I" . !~,l;1:(:>~~:l1llssome ..appeaD~Dg;chn.ra.ct~jstrcs 'b.ut ~s ~tw;,~~n it1:ve:stor:,requtrrld::relon.:s .on ~a;f.t;~iq !iv~~!!~, ~i$k a,';~'~t~)i1a~.'o:n:~pl~y~':a C:~Ii~$J1:0]e,m;i1nan,oe~ it 6s..a:'kc'J: ,fnc1oriti li:s,selnl1o~atipn d:e.Jj51~& toft:;1e~,e' .th'~ 'p,~rtro1r(J ml'!; .of -deDi .un,d''equfty: ;nst~uft1e:cits: :~~~1?:j.ect.lt~ hi~J~Y ""r~(~r~,,~.ss'~.I:I);p!lO1is.:~uch. $: ;lne ~Jey..i!(11P.f:ri~9, f~t:'l~~'rrig;.~~ av:q"~.g~,~ti'1po"!jij~!ng:, th~ ,dii'fil:~lliy or :U~Jbg hlSforica;1 ;t~:t:1}if);Sis t;~ W~11, .'~Qt.ed.ot'it.t.tthttt &~'<}ard me.:del~,ofI:Qn$Jim",'T '~bQ.ipe, ~~.Qfe.o.~f{.the ~rket ~kpre~1!{in'plfi)'5 f:!'9r;~ic!\1'r9re j;n tbe ~.pitaJ Ass:et Prjc;j:ng.Model.(,C~'A.P~~. the -tn6,~ ;;;"~~Id.~i;;djct ip4ch: l,o\.\'e'r'~'ptca~"s:~:etW(f,el) e'i'Ui~":atld ~~b.r I'efiim$ !hap ~:a.ye o:cp~ri"cl!: W. US,'ij1il~kcts.~\"11e ~Yir;l.eJy '!!s.ed.iJ:,e.ansO~~,~lm:ltjn',g.~qul~h.urd"je ratos by practi.tl:9J;et&: In recent:Yc~rs. thcipr.atti,-~1 i.lgni13~e (}f est{mllting sutn. II mnf.kei prcr)j.it;t;I1 has rpc:rc3si;Q~ .'s"O:c:al~edcqtl1Lyri5'k.pre~~n p~k(see;~.felch\'2000 't!l;l.dSir::g~l Slid TJ~~Jcr, I ~7}.ln (Id6.ition~'.fhe(J,ryca-!ls fpl: I\. r9.h\Oar?-!QCfkit~g ris'k.'Pten:t!4.n1 t~"al couJ,d,\~~11 l1rms, ~i.T!(i~ci~ analy~!s.-aJjd:'\'nve$tors emp:~6J:fina.ric1.a1 ',c;ha~¥e:.ov.ertj~e, .:', ..' {r~,me,)\~Qt:ks: to ~r)al)-"Z.e c,orporiate ,U,I'!.q;!n'~..e:;'i1f~i}~ .Thls '~a~e~ tak~s. nn.a1{~rn;l}e. ~?'Pr..,~.((h py ~~1n~, pertormanc'e. Fo.~ inst~,=e. the'inc,ic4St."l1 use oof :~~p~c~tj{)onal dntn:to estImate th~ m1lcrKetnsk ~rem~~. Et;onoini<;; Vt11u~ ~dde.d o(EVJ:\~) to n~s.es;<;':corp61'liioC Tf1~ ~~pr~~ch. ?~& :~:~ ,:rn~Jo't, ad.~:~nt;lg,e:s. r~r Ii I d d ..0 .,-..', "ract".l{')ner~ First It htovt'des' an tnde . pe,ormance.lasprOVI . I <:apl~ anCWtmpe:tuS',oreS{ln1atihg l' , "", 111e most .'. ilpj:1ronch to e:.ttmaitng ' 0." ,'0' '.. 1:"'..: p end~nt ", " l11e man,el ;. on ..0;, som~ avc,rage.oft4e hlstOtIP".l 'relies .1" b~lween returtl~ 011 r.tocls and bQl.1d~. Thl~ premIum t.n 'I. IUrt11mllnl. t~l!S can r;~p m !Juers an Ing JK~,Y 6 .- /.- 0-0 '" 1-°'r " . d ' t d o I "' Cd 0 .. t' fj '.10" .0 S 'r~nges or r!~ premJa, e~ .expl:c,a IQna r d ata~ 11 ,ow '"m'ye,-;tga,r,no,:,~~.',1rls 't' I" .' k ro;A.I' 'r ~"" " t' o ' . Jao ,. "'crtl ' lne Stl .. h r " h" nOc~ t~me vafJlltionS1 A' '-; prJ:\raJent .'- spr~ild ' Q~timat:etJlall;anbecOI'!1pa,redt9:~~ton<:;lI\I\'r;:ra,ges.. costs. 0 ."'. .rlsK e .", "-'-',,-- -.., '.'. .: : :._, ! :".~ 'y 1-IAR~S.~ MAR$TON-:,-Tf:lE MARKET-RiSK.PRe:MllJ~ .i~ia.~"t:O)J~h.W b~~.W.t;C;n .the fisk; p;remiliin tib.d. Iou.(' c,r.. ;a.f:rfe'~:~s:ilies :6f r.is1~ :ih.e ~pre.ad. bct\vccn }'jel~s on. :corpordtc..and ~UVemmei1lbbfia5, ~CtI'15U.nie'r.s~i1liDlent 9b°t.it- f~t~:~-~<?P~t!~~~c t;.O.!l~it.IOJJ'~;:ih.e p:~:ej~ie .i~.t! :~r q1spty:s.ic.1j "a~:t:.O_$:~ .i~:a1.\:~ts n.s '"qj:;"i (orecaS"t :Cb1~9-r3t~~j~16g.~. '~n:~ tl~..U:i:ip.Ji.~.9YQI~ii.1i~y ~n ll1~ S&P.S@ lIi41:x..dcri.v~Q frO1n.Q:ptions.oats-: ... :S~~lion) "prO¥id~s backgro\:I1~ .o.n:tbeesiiliiation .of :equ~t)' requite.a t.e:t~;::n&~.i1d,.~. b.ri.et q.iSC"USs10rl of f;.urrt:rit P!'ilG~j"ce.iJi.~a~hlirig tl1f:;mar}o:~ttis~premiu.m.. T~ S:e.~tior\11..m6deIsatd .d:ft3;i~.djscussed. fol1o\\!ID g ;! ~omp.arisM. of. i1)e re$uli:5 t:p .hislorical ret'urns .i~ Se"Cfionruf,~\!e examineihe tlm~..s(:ties; ch.n:~c~erislics ()fthe e~tit!1~tc:d:'n~rke;(F.ei~j-ui~ in $~ctr~~.iV: 1;"inaUy; ',ct al,,{19~8) ~ojnf out,. fe:v respo11;d.C:1i,~,'c~,t.~d ~~ 9t '~x~~~i-Q~81 ~~~a'r9 suppl"e:'i1:1~rit..9.r fepJ~~~,}1iS:t_~,tic;-.1J' 'f~t~rsis..i:l1,cs,timuting tl)c market premium, 'Sutyey ,evJde.n:ce"a]s'O s~pws .s:u~~l:Ittal v~a'J:On 'i.~' t;~piri,tt}l ~~_tiJnafe~. W~~I:I r,c;:~g:O~d.~.u~.,gav.e.a. ;Pte~-!5::.e :C:$tjlllate Qf the roarket pre'n:t1ntn:.,.thty.;cite.d figures frnffi 4~o ii). Civer :i~?r~(SrU,J:ler :e.t-BI., i 9~~). A ,till.ote:,fz:oni a~Q.rye)' r.esp9ndent h1.~hligh:ts, the range ,it! pr~c~ic~. .'1~ 1993., ~..e ,;polled \'arious investment b~nks ~nd aca.d~mj~ s~u,dte~ on fu,c :is:~t1-e'e.~ fq the ilP;p~6p*i~ r~t~'~nd t'ot-,a!}Y\YJicre pct\Vetl1c 2 np,d SOfc. put mQst }\'eTe be't~ve~n 6%' ~nd 7:4~o." (Br:uI1ei .Claf., 1:998). An in"fof!11:a1sa,l1:1.pJiqg of ~tffrent pr;Iic,ltce t;!.so r~y.e~1s l¥£c .cP;~.c.1u~1~~8t~..Q~~r~:q i~,Sec~iqn v. di.fferenqQ:~' ip -as~~piioD$, .~l?o,ut' IIJ1 ..app'r9pri.a:lemfj.~~~'tpre.m'j~D). f'or i:nStance. Ut a 1'999 ...' .J.~ack:~t~hq Tb~.1\otron.bf.a 7. t;l";mMket" required ~~c otte~tii is ~ ,tip,plt'c-atl,on or .F;VA. a~~,IJ~!si 'po:J d;l~.a.n S?C'hs, 'triv~.stJne'f1t'Ri~c;~<;'h .sp~i'.fie'~ a iJi~rket risk pre'nirum of'"'3-oJG fTom 199"4.;19:97'and3.S"ir. from 1998: 1999:F.:fo( ., .., ,. ." :tbe S&P IndustQa1s" (Go}dmail 'Sachs, 199,9). b~ (,h.e .tOjj~;.eiiie'ri~ ~r\.4.~y.t~1Y.I,I.se~'.~~Sli'Uct:~d~j1..~ ;;s,1.e(k) ;liUmeu'me, !,.n:AI?_til'199~ pn9T1c c~I;.lo stem St~~it is.~h~ef1'~C!i.n1~1}'! \e~) Qf~Xl'~~t.~d rchimn~.~~?ry~9. revea.lc.d that their owna,ppUcation ef EVA t)1>1c811y co_JjjJ?en$g~-rliy~~tpf:t.;.(6i P~"21:tJjg:t1r~~:v.er~ge;("is}; .o-f ~n1pl~ycd ~ mar~,~_ri,sk. ~-eQ~~;or§-~o...,11~ ',ltShppJi~aii~n ~a.~~ty 'in 1l:~.tmt.n"ts~n~:rec;e:r~}ng dol1ars'in~;ihe; futur.e. tif\i)~-GAJ:>M.,I~~t.Son'A~~laIes,(I:99S) \J":;.es ~ riral:~' ~th~r Jhan:" 111.bhtf: 'pres.'e~t..;llt':g~~~t~k w~ff t1.~p~n~ 9~ ric$kp1:e,1;I;\1um, Qf1.B%. ~O.t ~~n!;ingb;,;!3c~demiC$.do:n6t p~jl~$). re"ro:r.~~ :il~a:~1,a:~.je. J9 i$l~"~ce: ~.fI.,~:ll.f;:tii:~V:e il1-e: ~ffe~c~ ~f .fisk:, in~::estfi.i~:nf.s it ;~s ~.~~fu}:f(j; .( e.. g ,trgre~'Cl1' ih~rrsk~nuum ciiher.Welb1T~2t'Q~) sUrye;}~d ,,:~ ;rp:=: 1:nt~_s:.prnj.~:~~~ttjsk~P!~.mi.lrlh ~rp)" cl~fined as k.-:~~: .(1) . ~'jl~rt i ~ re.4U:!req:)'~~ tn~kirlg for ~.:zerb .r'i.s~IIi...:e:sQncnt. .ca~.4"pp.ti:Qi:alt~rri~~jv.e;. irtvestigator:S oft~n u~e ~vet~es .q.f'ruS19rlcal..reuli.zatio:ns to estimate a market risk premium..Broner, Eaacs...J:1timS,an~.Higgfns {i 998-);rpvl.de~e"C;~I1.t"~l:ItYe~..re.sult,$91:1.b~ .p~~liges l'Yt~tP9~ti911~:aug .fi!1!l)i'i-i~.~dvjrots." \Y..h.ile..alrrio;;t ail. ~pPQn.d?nt$ ,iJ:$~dsoin~. aver~ge. of 'pl1$t.data :jn estimatitlg ..~a. ion~iket risk pr~iniunl) '11' ...",de. "!~n2e of. appf~ac.4e~..c;iit~rge~. "~\.'Ph.e:moJ't ofo~ ~1 sample comp1!.ni~s..appear to use a 60+ "jcUI.hisioTicnf pcriod to ~$ti"m3te retllr[1~. Orj~ ~i(cd a window q.f le'ss .than l~11y~ars. tWo ci.iI;i;l.wmdo~~s of nbout ten 'jcars, one begnn 3v.eraglng ~:[fu }9"60;and anoth.e.rwith i 952 tL'tta" {p:,~:?}. S"ome.tlsed prilhme1i~-averages,a1:ld geo.t11 ~--~. sornc.used. ileadmg financilir .econol)"lfSt$:atl'il~-0f1:l:ni\'ersi-tJes.FQ:f ~ :~Ij-~ liorizQ~; ~ ro~d ~lli~an,ri$\,¥~i}11~i,i) pfi:~o/Q: :?:4(.~~~nge:f~rp~'1:,?o;o i.5%:'~rj~~1n:{.;::z;~il:i?~i1.er~I:tJ?~ ';;,r2',4.Oj~ !pascd pri-126 t~ I'~sP911,ses). '. . .rb p.r~\?ide atl:<ljlion311~igh:\ .01\;estim3'tes of ih~ 'm3:iket pren'l:rif1'i1, .we .u~~' P~~~IJcl~ .;a\'i\ila9r~" :e'XI1t:~t;lt:ioi1al 'ti:a~a. Thj'~ ::e*-pec~~iqna1' nppro,nch ~mp)6ys,~hc di.\'i~i;nd growt,h ~odcl'~here~fl.er referred io"aS rhc disco.ubted.cash flow (DCF)'modeI} inwni.ch a consCI\5US measure of nnlIllcinl annlyst~'; 'fO!~h~t5 {l-~AF) of ear!ling'(1 is used a,~ a: proxy ~qr inye$.ior. exp~~iations,'E~~!I'cr w'o;ikbA$_n~edFAF il\,QCf m91;1.e~s~ but g:enerolly 1i~ cqvcred: a ;Spnil of only a few ye-al"$ d.u~ ~o data 3vaiJability, .. JI. fY'lodefs and Dat~. The ~jmplest;~d moSt c:otJ:!mon]y used vcrs,ion of 'the' DCF Ipodcl is en1ploye -"'--'.-- --.,-- ; r- ..-~.- ' i~::~;', ~.:::." .' s, , k = ( b" ~ ~..:~ ::. " .. ,J,O,URNALOF :APP,LI:ED R,~A~.~.E,--- 2,CiQ1-, ,'; ..'. . I'; :. '. ., .' '. .3 1fI,i1i'k.c!'r*Ci1/!f~cJ toile of !C~tq 'is :c;~.:Lc.u1~~t;d, '1!s'~n~ (2) , 'C;~q~i, tli"1~~pq:paYI'~g s,toc~ in :lQe'.S.~P,~Q~,~ri~~. f9.r )-+::$ I ..~o " , .re:!i'ib,iilty whIch d~t!l-~~rc.n~iIj.I!lQI~. A~ .a~~Qltl.Ql\a1.~I;r.e~n~:(or. ortI~ ~n a gj~'el1.tn.opth.~'~eI1JD1"\1I.l.,t; e;.;ti,rm \;\'h~re J5'1~:4iyide!1.~ p~r'!iparc ~xpected .to be recf;1v~d ~f'(im~..D.n~ Pi! = .c4rr~i;i:\'Prtc~p"C;i"*IiFir:~ (ttme p).:rind g: = ~e~p"t::c{cdgro\,;,,111'ra~~ in ..di.~Mtl!d:s:pex: 's't1~re.;1A pnmarj'difficullyjn us'i11gthe pr:,F m~ecl:is o'Qlni.nilJg-, , :1£'t~~re ~.r~.tf:~~r.~~a.n '~re;. a1)ti~>'sis" fo.r-ecaSis'bl: if .th~ ;~I,a.n.p~+.4'?~y,~'ation aiot!-1i4 the JTI.~:~I)~ lo,f~.~3it' excee.Qs 2Q%, C~b)bi.!1ed. these" t\\'o ~9re~ri,;;:ciihiinate fe\v~r.than'20. ~D~ks a month. Laier we 'r'ej)art:dn the 'an :estimate ~en~rti\'itY.:br.thc of g.. stnc:.e it s'hQuld refle-ct elC?~,ctar~(),n,s4?;ffuttire 'performance. rr;arket: This p~pI:.r uses. results lo vaclous 5crecni:The T)1odel in E.quilti~~ (2) i~ appli~ t:"" '." bCF to 'each stock and the pUl11i~b,ed F..r..:f of io[).~~:r)l(l .g~o'...1h In e~T.n~b.gs~s:); proxy for g. .Equ~.tJQI\ ~;) .t:.!!.~pe ~PPile~ for an Illd]yidua1 .:;,t,ock OT eny PQrtI:oli.ci ,of C:om.pani~s. W~, 'lott!s. ptinw't'ily. Oh its aiPp1.cation to estimlitce ~ I:n;ark~t: Tesul~s \\'cj~1ited .bi' market ..'alue:'otequiIY \0 p~~~ilcc .the .h1nrk!:t..r.equire~ re'turll. '"f;he I;i~k p,r~~i~ is, cons-tructc,d b:y. s.ul'\tr~ctjl1g ;tbe ijj't.::re'${ 'I:a't~. o.t, government br..:.nds- .' . :P1:t?mi~ us~p~xi~~ b'lth~S&P~,OO; fA.:.r: t6m~$". flYr'!:I 1BE.s: rf)c.~ Th.c ~eal! we.ight~~ ~.9'98 results:by year-'-cnd t99?:m'a:rket va]1:ics sii1t:;e.th~ !P9t1lhly dat~ on :n1a~k_et v.ai~.e Q.i'd TI.Qt .W~ "\ja.!i!e ~f ':' :i: iri.diyiadalau,~I~'5ts" fo~~c.as'ts o'ffive..:}'.ew g)Q~.th r-ate. extQn(!tlirw~h~!:ij~,period. S.ii.1,qeda!~o,h:n,r;.n};--5:l?c~,f!c .tLTEPS is;Q5Cd as the i:cstiilJ.at~arg. in. i,11eP.CF'n.lod-e1oc 'dr~l)dend ;}1e.lds '\"ere not.:ava~ca1>le:f~r. tb:e: 1~5l foiil-.'" .The.fiv!e:-'yeb:rborjZ"ouJ$1h~ lQng~sl bpmorl m',~t:\vhic'+1. tnonfus cl::i9~s 'Ill the time-of t11is s1udy.'the mnr,k~t s'~!~hrQf~~i1st$ n.re'~y:a~!1iplef'r~~IBES and.often is the diy:iqend 11~lp";tQ,f ~hes'emciIiQ1.S: ~i,::a~:esHm-:ited~ using io;rigi:&~ horlZ6:11 u~.e'4 :by an.~JY$ts,.' ~;i3.~S re.."q'\les.~s....tl:1e' -4.i.yi'd~.4.~j~1.~. fepOrted ,!'t!~qe Jf'g(Z~t!:~~ Jq:ip"n'a ~'. .,. .!: .. ~ , .: , ~::.:::. ". .. '!'o, 4 ..,.,;; fr -0.' , '.'" ,0 ._'OW 0 ., 0 '-"- , --- .. :HARRIS &.MARSTO~me fMRKET RISKP.REMJUM ~x.hlbjt1~.: :\laria~l~ ' p~fJnjtions: " k~ ...,- .=; fll '-~-"--""""_':"-'-::': E9.~i~"!rc7\!~ . ra.ter:,~um. 'C'c;~C"'o:.;:'.~':.~c,--,,:; ~' c""'~-'~..-! = f(i~e ?cr ~&:{~. ~ ~p~,~!:t\ c!i:\'id~.d per &!i:1r1: meas~red:l$ CL/::tent il1l:il~;r;~ :u1nu'II. '9 = '" ... l)j. ~h'1~f~n~ f1:pm'CO~1PUSTA r".t9DJtiptit:q.by'l;l. 'I:..~1.. g = i =: .. A \'c1::ig~11!1hnci:\1 tUlal'lgt&'f~rc ~st (1f fi \'t-yea.r troll..tlt q.t~ 111. eimj~&:; p~ ~b;lre (from IEf.s,. YJ~.id.t"Om~tud~Y'O{J Iq~-g-lt:r!:l)J)$.gQ\'erpm::nLoblig:l!.io.ns(SO\Jl..C: .FcdCtalRtsc,f..e.)Q,.\oc;ircunstanl 5:itjeS'l, ..,.. '. n\liiurltv .' . . rp .: Equi~yrlsxp~mj"urit<al;:ulriledii:!;Tp=.k",'i: BSPRE.4.D .: ~pi'eadbetwc~n .v1c:ld~ on Cl~ot~1c'uric:i govcmmcnl:'borias. BSPREAO = ~ic1d 10 m.:lI!lr~I);'on41n-g.-trm\corporatebol:l4-~(Mood~'.s a...erasc~ro~s bona cntin£..co!egorics) mir.usi. "';;CQ:-I DISP ==.' :II.{@nthIYcOnSurner'COrifi'deiiccJ'nd'e:" rCpbrt'edby tlie C~hfercni::'::B'~d (divided i?~loq). ..: = I::>i:;p~r!i[on of analysis' f,.\rec:.a.o;t$,al.l11~ markt,t !evcl. 'y.p1:!~ili!)'.~r\?r ~c:~+P5g.o i!,!~~ ~ ~pJi~rJ ~:up1iuli~:'!f~a, "}C'\'c.1. Th~ -firslprc>xy COl11tsfrom:th"e bond:m-arkct :a.ila. ar.6uJJd.~'he; m'ea:n -of indi'i'idt{al .:. fo-~ccast$ . for 1l1{\l ,is c_~lcu1.a~e;9' ~ :t~'Ie ~~~~d getW;~.e_n.-cot:'porntc~~~- ,tornptlIiym tll~t ill~nt~~m~~a1s~,~\':~~ eS[~~.~t.~d\!.S\ng :govem~e~t"b.c1ij.~.y1~I~~-,~S_P~!='-J\..R),Th.e .rB'I.i9riaj-.e 1.$; e..Yil1ue:';~'eighte;'d ',int'3St.'T,Cof 'a:I'i~'l)'st~:g~~tsi.ori for ':.fue.fir~J:I;~tP 9ltt'$1l:mpl~..rr;h~::rc~d.!1~ :r~pqi.1~.d;'i:I~~:.l11e. fba~ j.n~r~a-$:C;;:s.i:j} tb;i~:',"5:preac! $'i~tf!1\ .jp..;.e~t~fs' ;p.erceplI9.ns.ofincr~f1sed iis.h;ne~sqf.corpori1t.e uctiviiy' , tnat w_Duld ~be -tr-arts1I1te;dto bQtb. debt- and equ'lty' o\\'l\ers., The,seto1fd medSJJT:e, coN.-, .is (he '<:Oi15um~r " "'.. :c-onhd~~c.e l!1d~x-.tepi)rf~_d:by the Conferenc~-Boara ~t. the t-n4 ~f th"e::mortu\. 'Wn i1~ 111cff;'portcd index terids. to be around 100, we r~~ale CON- as the ~ct\la.l index'cli\-ided'by 100~ We. nl"SDex1!mineo.use of CON as o:r the cnd o:f the. pnor monTh; ho\vever, in regrt"~i:on. analysis, this lagged D:ieasurf; .ge11crall;{ was ~-ot. Statisrlca,lly signIficant Ii'! explaining tlle levcl of the mark~1 risk pre!J}il~rn.. The third measure> DJSr.. measures the di"spersipn of ~nalysts' rorc:casts. Stich analys,t disagree;'I1ent should be posi1.i\-eJy rc!ate-d to perceived risk siuc~ hlgh~ levels 'oful1ccrtii:inty \~'ou14 'like,ly generate a \vider clistri.bl,ltion of c'arDit)~$ fprecnsts for a given fJ,ml. DISP js calcut~lcd as the avcJ:nge or-fin11-s.pecific stt\ndard de\'.iations for e~eb . .stock in the S&P500 covered by lB£:S. The tinn-spcclilc st;:nd~rd -deyiation-js "';n~culated b3S~d 011 ..the dispersib'n of i.l1dividual analysts' :g'rowih forcc?s.1,s' "'Wr: ~xnmin~d.- two oth..r pro~le!O roc Con$um<:r Col\fide:n~~. T~ Cqnfercol:e Bn:itd's L":nnsCtmcr EXp~C1atio:isInd~x 'yielded cssl:nliail)' lhe s"ari,Jc rc:~ultsis tIJO!;C fcponc:l1. Thc 'Univcisi~y of MichigilR '$ Cqrrsu!I1erSentiment In(li~e& tend~d t;1 be Jen sj~ni,licalll!y \jnkc'd th~,lt)arkc:t rccl"licicnts wr:re stilr It> 'n~~i'11,.;~. - t-1sk'prtJUium. ' -' ..:~ ""'.-_OV_'---:- th(lu.\Oh '~.'-"-'- , .. I i; ::--:0"0 :.,~:;. :; ~ ': .10 ~ ")5,03 '2.18 ,.". JOURNAL OF A??UED EX1}it,i.!t ~" f;3~Qd "M'a;r"ke;t:Y'!~.f4~, E:qul'iy R~q~ired ~eturn. FINANCE -2001' .~:.,,:: 00 0 and ~qult.Y ., .,Ri~'k-Premiun:!J.1982-19~S '.'" -'-. a. 0 ~: ~... oy o. . !, :. \r3)~e~arc~~ctaz~s flf tp:Oi.;th~y~gure~.jri..pc~£~nl.'( !~,t)1cyi~d to maturitY, oh io't1g~ltfit1,~.o-:e~'n~~l1d$. ~is the ~gt1~d ~~ ptl th:cS..~P500"cst].trlat~d.M.a \:nJlie\'t:clgpreaa\'cliige IIsiijga discountedtnshI1o\v ,tUodclwjth:aJ:~~ll:$Jl!r(~w,lhrQf~cam's. The .n$~ prernil!_ln rp -kj. t.he"!l~.cT1jgcpr-1I~~)~l,~':grC~1'b for~~ns,~.$isg, Pir )(!i/~j~.~xp~:f~d;.4~"jQ~na:p~r s1iIJre dl\:ld;:;<;j 'l;X piJ~ ,~e:r 5hi'l't~.. ' ' Y~r '-"'"'--":-"""""""':~-"'."""""" ',. .' P!V~Yiel"a; ~ .' 1982. 9 ~~ " , k .-'-~ .'. .] rp =k-l , 12,7$ 6;.8~ 17.R6 ?1.1:.1 H 6;5( 12.02 1757 }i)~ 9 .1~- 5.18 4..97 11.45 1.6.42 1986 4..08 1 ] .l~5 15.13 v~~o -.,.. 1 .~... 1987 .3.M i).oj 1~;65 S:58 6.07 011:00 15.27 8.96 b_-q'( S!4S" 6.5~. '". 1983 12.(;0. 19:?4 5.55 198.) " 4..27 ,tQ",79 :I -to- ,. .19&9 .~:!f5 I:I]}? 1990- 4,P~ 1.1.6.9: 1=i.72: ~_;~.I 7.;11 l§tjj '.';:'~: -11.9.9' j,5,q;\ ~.~4: 1.~ti .- 1992 :j.35 j1;13 J9~j .~1:~ l.l.u.~' 14.7& 19.94. :3..-(.9. .)1.1'! 14..6n. :3.04 -]J.51 J"T.:>. 1..60 11.8~. 14..~i) 12.66 14.7& 6;.()S) g-~7 ~ i,is.. ill. J996 0" 199.? ./ ~f::: :. .19.u::? 12.76 .1995; . -""-- -.6.&'9.' 5 -."..", 19,88 ~.::: ". "" J99~ ~ R~ AI't"rII"t!"'. 3.:84 .1 J .'8;1 ".154 .7 "- 5 :,1-'5-11.7 ~~{j7 1;~i 9:.6.\;1 &.).8:: 7::c-.::-r 7 ? ~ .~. 9 .~w! 7.~7 6;~.R '6 '" ~: . 7.79. ,00 8.S] ---,... 7.!4. ._,~ ~,. go,'crnroent.bl1l1ds j'~7.14o/i1. sli~btJy higher than the 6'."47%a¥eraig~ftir of982 to i991 repprted by:]-Jiltrisand f\r1ar'§IO;D (1992). For c-qmparison p~oses. E?lhibit 3 cotltai.ns.n.tstoric:alte\urns ar.d risk p.remifi. Tne ~.!'~rogc expt:ctatlQnal risk pr~I:li.iu.mrep9ried in .E~~'ibit 2 is t1pproxrmate)yequal to the arithmetic (7 .5U~)Itmg-i.er!11 diffcrcntia.l betv,!een returns \)n stocks :1t1d')oJ}g-lcrm E~ihil'rt 2 sh~\\'s U1f:cilima(ed risk premium changes oyer. tilpe, ~"P.gg.e~ti!1g~b.~ngf;S ~l' the mark~.t's perception 0 r theincre!11~ntafrisk of:iov.cs\i.ngin ~quity father tl1U!\de!;t .s~curi(J:s. Scatining. tl1.. .}ast c(}}umn .of Exhibit 2, ih.e risk ,ptCt~iul1Ji.s.highcr .in thc 1,990s th~n. enrlier and espec,ially so in late'] 9~J4nn!.!1998. Our DCF res.11tspro\;de nG:.c~;iden.ce to ~upport tl1e , govcrnmctitbonds... noiiQI1 of a decJijj~!1g:tisf: preq,ilim 11' the 1990s,:as~ dri'r~r ofth~ strong.run up incquity pri.ces. .JnlrrT5Iiit:;ty~ (ur ihc [1J1;2,.1.9...6J2'~rjbd 1111::!rithmclic spr~3d .f\ striking fe:ttur:Cin Exhibit,2 is the rclative stab;ility bc:i,,"e.:n rjjts~' t"Qi.npan)"stocks una lCln'~-ll:rm g(1vr:rnm~nt or tt!ec-stimates."of k, i'\rt~1' 'dropping (Atong with r;~nd!: \vas gllly 3-3"7. p..,r J~Irr. Th~ lto\Vn\"ord'"lr~~d ~ jC\~"'~l r:1Ilcs tesllltcd.1n ~vt.hlge Atin\ral retuTl1S of 14-")'!~ on Jon1:- 'interest rates) in i1rc early a[jd.niid-19~{ls. the average ni11luulY~Ut' Q{.kbns remaine:dwtthj~ ;:175basis pomt tcrm S:lYctnmcol bClnds" u..'~r Ibis. h\\rizI)n. s.oiile (~.r.". lbbplson, 11)~}7).~r~u.: lh:lt ur.ly th~ ;nccmc tnoL lata!) rClIJrn (flP,ge "round }.~YJllor over, a decad~. 1\1oroo\'cr,tbis on buDd~ ~houfd b~ t;UblrD~~~. {n .:.,lclltaljn~ ri~.~ pl,"m1a. ~ta.bilit.Y arls,~.s''despitc ~,6me. ~:arinbjljty in the ~--~. ;,.;';' ...'. .. :. . . .HARRIS l,M~~TO~-T.H.E tvlAR~ET~SKPRE1./!!I)M 11" :g~~I.bj~~. Ave.r:age H!$"torlC:aJRet~tn$ 9:1:1 Bol:l.ds., $to.c~s,"Bi(1s, ~"rllnflati.o.n)h ..&~.:c. ---"--~'-' ~ ~--~ H,~~i~~t~ .Rf;!a 1i~~9ns..Arithtn:eti ""-'-- ~-~_c"-~ ...; ~metric ~~n .Q.:nJl1:'.:m St<>:k(!,.;If'.,'CQ)TI~~) ;~3 !~~Ir;f a:iiJ& z.~ l~f1o'i.JO!1~~!oe : ;---: ,-.,..: :-, c Mean .."-- ll.2'7r 1~11~::~rQ>"'~1J:~r Bonl~ --:.:.; th~-U.SJ 1'~26-1998 ~ :' ~ 13-2;% .s:? 'J.~ _'_00 00 o.:_-~.- ,") ~..,. - Sin;rct;: Ibbb:""I1:i\~i£ICia!c~Inc.. °t9!)9 Slc,ob, 11,,;,,1.\'. Eills cnd In]1J.Jii:.iI, 1"999,,"'ni't>i~,;k. o~~-~---~ ---0-~ rela,t",~, :s~ta;biJ.it"/ .ork 1~:n~la1c~ into Ijaran~~ cnnhg,es: in tne.:l'tlaT')tet~1'i~~.PI~~lj\1m., ,1n ~' ~ubs~que:ijt i:i:ecrjc:~~ '\\'e e'Xi1n~iri.e'Wbctl1er c~"ng~s in, pdt m~rk~t tis:k'pfeil}i4ro e-~tfin'9;{e5:'a~ar,1if):ked 10 inte'r.es1fat:e.cOhdiJ.iohs !i.rl.d (!~nutnbt:r,o:rproiies for riSk. We e},--p1'O!ed'the s'enstu\'ity .of the r.esu1ts it) o.tir ~.~-~~. \Vi.tli.(;hangt)Sin.~lie ~~onQt:t1.r'~\1d cqui~ymvestJn~ts.may be f c.[:jnslaI1cc. investor CQl).l1jt,lol)s.like))( ~) f eq L,tjty .fjnan~n1 p~rcerved se/1:timerit iI.ftecJ:S .i(jv~$tti.l"e:!1 n;tarkcts, 10 change aqQ,~t .a.t.~rt",!iif!S in risK. f!Jt_llre b.tisln~ss :n~9~t.t~e ts cQmp~l'e:cl' ~\$.k'!1c~~. tp)~:y:e~rro~n($ :fn. u;1;e l!9'Dd mnrkei~. .Mf;).re6v~r~~ij1Ge:.:bopds -aT~.ri~ky ,~~r~enin~ ~tocedure$. in seie,cfi'n~ cfJj1JJlatile~. T~, thel~}ves, eq:Ui;& I:.i~prc.mia (relative .t~PQj',~e;l!::r~~ts, ~c-reen .t'ut ~ll" no~:~~.~~.!-1d ;payiu;~ !lnvc5-tmen(5, .to .b.bni:isj c'"J'uld I:hn:ng~ .ul}~;iO.:~hat1~~s .i~' pertei\ted ;~~O;<!ks'o!1 ;~~ pr~iJ:!i~~ th,~ ,ilse-~t tP,~,~RI:"'~~~e'~: ;~. ofbo~t!:s2.~ve~i..ife:qq:it.i~s: ~j$pl!!'Y~4 n;~.~frJ~:;; ii1apPrP:p:ria:te },ii '!jucb' t}~st:s.. 'J4e d]Yiq'e;.~~ ,s~.rl:,en:' .i~"k~~ss .. e:lri1illi~te~ rijj..~V~n\gt;. of~,S ~."mp~}~p~rn1:Oi)1h. In ~ in. ti~': 1!1.:f;')~r1l~t \Va!;\(,' ip\~crij1l?, th~ J~,~2;' ~ 9.~.r peripcl, .H~j~ gW~ri in6P'th4'Y.'ecit~o ~qee,n 'out firn~,\YIW fe.'rver than' ~~r1::~:3n~1J?ts~.,fpr.ecas.ts~..."Or if the, standa rd rle'!i1!:u'on :aro1l.nc{ih.e. meat1..,forecagI e:tceeds .2,O%~.'WheIJ trJe, and t.,1ars,tQn :indicating an~lysrs. js;:r:ep~ated \\iitilbul aFl'j rsfth'e ~b.t{;.If= s~~'e-,-:~s;~:lcv.ei the th~, '.i~'~ag~ iJ";$",~. :pre:~(lni Qver' t!1~ sa.mp.l~:;perf94 "h.1~fe~.~~"~r.ori.ly40.~a~tsP9int:s. from i:l1?i:1JI-a:1.54YDo ..~~,~~~ .t'\1",tht"samp1e. firms illso wa$ 'e,Sllm:ated il.fJ:d ,th,~ $~In'(ile .,?'yetage \Yas: :Qrie, :sugg~$.ij~g 111at ~he: scr:e~~:<l{jri~il.s:yslem?'icaUyrcmove'iow:.or ~lgh-1i~k :firro",.:~Sp~ifi:;:~lly.'usin~ .t~m$ in :the~c_~e\)ed~~amp.le ,!)S'of DecertJ.ber J991 ,(the (as~date for .wlii~h ~ve h,,'d' C'RSP return. datil), 'W~' Ilsed 6rdihary'le-ast 'Squares' regre...,;s:i:Qns :10 estimate Dota 'for cac{1'stock using t-t)c: pri:or 6.O-l1Jtj~thsor data and 1.lIcCRS'i' return t~PJ~TR,N) il.&\he !I).ark.et..i:noex. The v:c1ue-~;eighW4,everagc Ofl~)f;' in{iividufI1 b~~5c WIIS I.QQ..l Tneresult5 rcporled 'h'erc~lsc. firms ;11tl1C"S&P500 a$ . rcportt'd by COMPlIST.A:[ in September 19.9R. Th.ls ,could cre~te:a survivOL'slup bias. csp~ci..i.Jlyjnthe carli~t -\11onihsorthe 5nn'ple. Wt:~ompared ()Dr'c\'itr~~ rcsul\5 ta tho~e Obt3ined in Harris 1111<1 Ma~to-n (1992) for ",.hich illerr;. \\"as data lo upuat~ the .s&p569. cQm.p,i>siti~n "e;achrI:1°nth: For tile oY~rlappJ!1g perI9d., jt.inullry 19S2-1v1ay 199 J. th~ t,""o proc~d~i'es );ic-ld t'~e' same. -n\ler',ag~ mar~~e1 risk pteruiurt), 6.47.%. liiis, Sl!ggests 1.hatthe firms departing fro~ or enlcnl1g the: ~&P5QO incl'cx do'so forB numbel" of reasollS ~'ilh. no dist;er:pabl~ effect on the overn! J ~stllfli1led -'".-- .-.;- --:-I, :O:992),t,epor~e:tf t;ifri.(j-\'erit-m:em ' ...' '$prea.d .ylc,J:ds: c°iJ!or~~ \'OL; Qf The of .series we '-introduce ri~k s'libwn In 'gD~ve\1i1'Pent 'P'6..~.d.. yi:e.Ld. for :xndwe.,supplic'd ~JJrea:Q. equity .e.r :1.:. CO.N.. .fro,~n bj °J,tlqn l1ummary IInd.share data E.'"\bibit !-tarns and earl.i~r -on ,~ th~r four 6!1ta}). ~nd Marston (1992)..1 ror1he Tisk entire prem,in ral~s. This 'OLS rcgrc:;!\iOll~ s~\'r:re .Uu.lof;tlrrel:!~jQn. The, ilre tle:gative 't:Y.~I~. A5 e.~rli~r sa.mp1.~ rctatio~hjp :'-" with anal)'si$. perioil, is :a150 we A in1erCSl Lr~le the the P3n~1 for '£':IICflllly u~r:d by confirm rclntedl(\ at~ Y.1riab!r:s a re$lIlt. provides, measures. re$i.l1t~ l)~&ritivel);' int1)e in V.est ors. F.;.;hlbil,4 'up..Qat~s li.nd j'11~epehcfe'nt agents risK in ante DISP, thre:e: :qirfe~e.nt of.tbesc 5 replicates. p:ttterrts. :;ho p,rice all ~'.(jS risk. ~(.'o;1omy (conswne~.. ~quj(y ~D?,l)~S:ts" ~d ..,. " .(\1a bQhd. 'ildd.itionn! ~hi~fl cO(ne :\vi'ti1 ... ' :.J!ro,xy tbrec three:h1e&~tire.s dgfa ,~n9 T.hi~ '!s ,a, time. :paJ')er~ Wi1l\.:~hc , li11eresI"rales'arid.inl:ir~'ased --, " (BSPR~AI)). n~eaSUies ~e{~ ~mlumde~re~:ed betW~n int~rpreled t1i:15 T:e:gr,~.s'si:on...re.slJ.1t5 thal:t1te:m:..rket both shf\~1:11 I'roli.I;-Wlnii!1:11 rnttb.L,d (on l.:-vc'J$tlf vari:1blcs). al1d also OL5 r\:~r~$i\;[1s bn lir.;t diITr:r"nc,'~ r~~I1!tli anu l'l tilt: .pc~ilic~"iGn::. Tt)~ts I:.xbjhit~ ctrors \::;ing S :rnd v~ril\l-.l~~. Inttcr -\\c li:sd report Sjn~c nlore. ollly Dt:rbJn-Wutson 6 do il.:s.ts 31 .01 110.t nccC}'1 !'I)th the' reSuI(~ ~tatistic~ tile methucl, Y;I:I.I."'" stllb]c,I:OCrlici=nts ~iqJ:\ frdI;1 hYi'ctb~i.'! sin1;!..r :ll:ros~ first dirf.:r.=ttc,~- rr:gr~5sion... .or ut,ll{}I:O1'rt:i~tclt in ~.Qll3 Maximum .Q2~4: .0070. :oo:)t -..16."'1 12. .JOU8f'1AL<;>f:~~I':'!:JEDFI.~t;E,"""," ~!J~., ~x~i1.>~.~..~.P.p~~f~ptiv,e .s~~1.~ti.c:~ :°.11~iAI1.~~ R!sk~~as.ure;.s. ..' Ellt:'ie~ilrc1asCd on.n'IotJilil>~ <!ala..BSPREAD is tliespread between jieids on long-,remtcorporate.nndgo"cmmenfbond.s. tON: ISl"'~ COTJ$uTJ:lf:t'-cQnfi"d~cc; tn~~..DL$P .rn~a;;I!T;s..il).e.lIisper$iQl1'pr~I);i;I$'rQt.ec.a~-; o( 1.'3:!ri1ri@ gi"t!~;.i1i.VOLis~vof3tili()'."n l!teS...'i:I'5GfJ indexImpliedb}1:cpijOn,s dalA.V"ri~bl.esare.~p:~sed.in dccima\fJo)r~~ tc.g:..I~%.=..I.~1. ~ -:;--- ._"~';';.--:__:~'--"'-;,'~"~.c'. ~c ---=~ ~~~,,"=-=v.=:..;.,.~---,---~~-~~o-c;oc_o'---~-':jfp~,4A. ~'~lf~l;11e:\'Clr:~ ;\Jon-i/l1)' 1;C}'t'!~ --' ' v i . -St~l'\.daraJ;'>eviatio~ Minirriu.m ~=-~~,--;- .Mean J3.5PREAD -~ .0.040 CON' ;£)504 .22-42 ."t""7 , 3 1.382 DlS.P :U3J9 .00.70 .0285 .0687' VO~ ;r.'i:91i? ~ """"'-': -:PC!nej'~. "'~'"" -~ .~-"""'-"" ""-,---" ..Pal1'e/"C, ~~~REAP BSP'~:';:'D. 1.0:0 CON. .:.(6"* Pl$r. YOI,.. .,1300 ...".' ..ij10'. ;QQ24 -~QJ~Q. .'O.~?4' .,iJ~92- ~.2156 .4{j:g.l.. .~~ (;rJ.ri:clqtil;\il.r:.< -~- _.~~=. . Maximum ~-2,~"'~~~'_~~..co;-~t!Jf}~~I'i;1J ISlot: .M"Mb 1.\'.. C:~l1Jj$c;\"-"-'-~~~--= ~'-'-'~---'~'.'- CQ.N ',- , -- DISP .,_. c' VOl.~" ..4;4" .0.54 .054 .2~~ -.~':";;"';"'--""~""~""'-;"~--~"'-"-""-" &~si~niflC~,~Jj -(;l!tr~~ctlt .frQ~ .zcr-o ~l thc ;95, ic.yc1.. ~i~tiifj;:Bn\I~"dift~rcitt IiromJiCrI> IIl~he .,O! le:'fel - .0549 '. ...' ~~~ ---"" '."" .,:0034 i-~fXOO6 -c- ~.. .000 ~..Q£)QOL. ~;OL .6~?~ ~ '-.~ t.1irttmum ~"9Q~.Q pt.$.p ',- Stancfard~Deviation ,.pOQO.1 :<;.9~ "-:,.' 'l/ciri.'l:bl~:C?re f()m~f>:~C;:hlf~i$q;i' ... ~SrRE.~q: .0755. .,'::,,-,'c Mean ' -, ':9{J97 ~'c.:._. (:00 .055 .065' .00 .o'e"7" .02;1 1~:G -"Q9 .!.ti). "--'"",-",-':-i"~:.,.- ihe ]980.5'~h~ ,19.9gs~s ,d,isplayed in Paue.l~~",and C. 'FPTth'e:cfiloi,re1982.'(0J 998 period, ihe nd,di\jon oflhe );~t,cj sprcad rjsk prp~y to the re~ssion'S low~r!! the ,tI.'Iagnitudeof the cQcffic:icnl o'n go\'emmem bon.d yieldS. '6Sctm be se(}n by comparing EquIlilDJiS (I) and (2) o[Pilrie} A: Fu,rthermor'e,Ihecocfficic'n! 6rth~ YI,eld spr"t.-ad{Q.4.88j is ,itself significantly pO$ilive,. T~~ psttern ~uggt:g\stl1a(Qreduction in the risk,dirfei-entia:I, be,tw~en 'inv~tf'l)cnl in go\'crn.lJ1e;nt{,pnds and in c,orporate bonds is'trtlaslaled in'to, a lo,wer equity ma.tke1risk pretttium. In majbr reS'peCl$.th~ tesult.s 1!1 ExhibIt :) parallel 'earlier findings. The IDtU'ketrisk premium chabges O\'er tt;le atld app~8i'.s inversely rclatcd to g9ve:rnment iritercst ~t,es'b\1t is positi~-ely related to ~bcbo~d yield, sprL-ud, which: pl:oxics for the incrcmcj;lta\ risk.. i).f rn~esting 'in equities as opposed to goyoPlroenl bprtq.s. On~ siri~rl1g "feature is t!'lc!~.rge!)ega[jve cpeflidf.ents {)ugovem:tneut bond ylelds,.'Ti1~ cpc'f:l1cientsinaic~te the elluity' .rj&~.'pre~il)m -de:cJ;iIlcsL,y QVCIJO Qil$is points (ar II. .1()O 'baSis, point J'nc,ea$'~ in govern~<:nt. irttcr<:'!lt .rl1tc~.1This invers~ relations-hip su~ges1s ~-- , ltbc E~hiblt 5 C(i<:rfjcjl:\ll~ ClQ1 II!C sign.i(jc~rit!y difr~.rent fcQru -I. {), .F.!Jggesting tha.t ~quity 'req!1ired rctUms do rcs;P9nd In i!11.:r,r:si reI;: chnJlgt'.~. !1~w~"cr. t,be large ne.&lItive co,;fficll.'1lt's imply cril), :miiJor,~djU~n)~n,~ ~r rcquir'ed r~l\!mS to inlCrltsi,rale cl:2/\gCS :oince th'e: risk pr'~'11iuni. ceclincs. In earlicr ,,"tick (HaiTi,; IlniJ MIITst:on. i991) the (;o...ffici~ni, WilS sl£:t\l1il"antly 'negmiv.: but not c~ [?rg~ 11\absolutl:" VlIlut. .10 In..t car[ic:- W~Tk.r w~ rcporl~d mu~is"lisillg' lhe :P.rai~-Wi,nucn e1i.mators-. \I,~.:n \"eo U:Scthllt e51.imn11.on ll.-.c)l11irju~' al\d T~rclltc the sl:cnnd'ri:;rl;ssion in Exbibit S. ib.1: cocj~~1.:nl r,)~ i I~ -,;5S;4(I to -\2.2..~~ 'for.thc- cnt\rll ~C1Iple p~TltI.<I 19$2.199~;, -~--, .-, " .~~. :57 ,;5(,' 'O..Q~ tiAP~tS &.MARS19N-"'ni~ ~'RjSK ~~hibit"~.Gh~n,ge;~ PREMIUM. In *h~ M:ark:~t ~ql!it:l.Ri~f< Pr.emil,lm QveroTimeo 0" :T6e~~ibil ~f50i1S ~~}iOI) ~ot..ftI.c1~D!.s {!-Va.1ues).'~~grCs"~i9ri ,est!i'I1~t.~.\ii!~.a~"-";1t'ia~t;S.~ptt's!.'\.'\!. ~ mbt~li..chi!ri~i;Q, ~(j~Ct rorn.uio<;brrel~lion;.The'd,::p~ndctit'\"t1"tiablcis the mntkct cquityi'i,$k'."p,l"eml.lim -f~r'1heS&PSOOIn~ex:..BSP.R~AP Is:;:tn.c .~~c,\d"l1C~)\'.ccQ~;ic}i\.~ W )9P'g:'\"t.~.co.rpqrute1!l1aso~~~t bon;;l~..Th(!'iI~ld.to mat'uri1:ion long~l~nIlgtjvemrneilt ~ii~:is 9~~ie.CJ'B:.s'f. F~r"p.~.~f11}~~~g'r;~~t~.. '~'ilriab1~.Ii~ c~p~ed in 'd.c~~31fonu. (t:~ 12,%D .12). ° ~-"~""'~-~-=cof"'-'--r c" ---' . Time 'PerIod rn~~Pf~ ;-\; 19.~;2-1998 .'. _! -.901)2 -.-ii.69 .(~) .49) (-16:~4)' :-.0002, ..;.QOO4 -'.759 {.-1...~4} ..~OOQO -.&4cQ: (0.0 I) th~ Market tl.9i;J) ./>:4. (-i 3:..7~) -.QQU£;} Cha~.~.es:in i57' .508 {-7.-1.~). (,.0.09) ~xhibjt6. ,.S? C2.94} ~.S&7 (-lQ,97J -.GOOS .!~.9fJ~ ;.ff .,488 (-11.37} '(-I.p2) 'to ..B-,,~PREAD. -.749 (-l.t!) E. 19/JOs -'-'-. .;7~7- .34] (-9.85) (i!16) .;.q5 ... Equity. Risk PremiI:rri'lOv~rTjmeand'Se\ected Measures'of Ri;:;;k. .. ':fJi~.~.~n!9IJ.r;;I?-Q~1;t:gr~!j_~iQ~ co:~mc'lellts~:..vgll!~j.Re~r~5iotl cstlnla(~s \Jsca11.varl~bie-sexprc.~seda~:m~nilily- ch~~:g~ :~9 is !In I~p,g-t~ bO11as..ls deiioied'lis gQ'I':!;1"olim~.t; ii. t:.ON ~"~~::c.:o!iS;U.ml'r ~Qn:~~r.J1C;C.:i\J.de;.P.I~P ~~s1,lre.s. 11;J-~"41!}p~1~'n :Of Mri.ry.~~.' :t9rec(i~."t:$;~.f' .e~"I1;n~s.gf9~'tn. 'Vb_t. is the'v_olaii1i~y on the s&rso~ jn"d~x impl,jea'o1. OPUOrlSdatil'. For: ptlI'pC$cs:~f thc r~tc:~f1'~~1 ~~~I~ aTe;cxpm"~ iT'.d=c,ilm1J(ojm,.(c..g... 12~~~ ,12). ..." "'--"'=-~-~--~'-~-"'.-:"~==--'"'"'-TU'nePeri~d ,:~ '. ~.~- !nterce;.pt .-, j. '. ~-'_.;:'~.-.~!".!':"'-!-' ." ,BSPR$A;D C~,N ...:~;---;-;..-~~ 'D!~ Vp"~ Adi, rf' ,.:--_c- A.1~-!>'98 .,." .(.1) {2) q:@~ ..Q.qI4 "(.97) :(-3.5ff) ..(J.i37 .{).OOOI C-lljl) <:-,96) (3-) {4) (S) (6) .-0.007 ~2.?b) (-~.48) 0.0002 ... (.19) -O.C:XJO :.oM 0:124(2.38) (-11.4() 0.433 (2.69) -O.g/8 (.[1.21) U:42Q (2.52) ..0.733 J .(-.9j) B..MfI):191%-199.8 O.45J. {J..OS Q.OCI:IJ (.06) 9.1'8~ (.~.13) ~}.@ -O.!:X.1S :0 "~'\-I- 8 '0.68 (-l.p). {3.77)" -{).0\;)7 (-2.77) 0-;000I (."53) 0.326 tl.95) -0.831 l-ll_~2) ..~".-.,.. ' r-- ':'-~ - . -0.005 0.:11 ~" 2 (-2.12) (.1.7!) 0.011, (2:R9] .tt.~ 0:.006 ,G..1}9 ' {,-"66) ~.~ 14 Of. .'JOURNAL .' -, APPLIED FINANCE -2001 :- n1uih gre:1t:~r.s!:~biI.i~y.\J'!.e:qi1.ty j:eg~~r-r:9.rf:tur.ns. than th~ !I\!cra,gevalue ofi"itor January, reb~ry~ lInd March is oTteq. 'c:1;s~um6(f.:.f:~ri!1s"taT1~t~, s.{a!ld~.rq. ilpl~H~nti91\ . i,si~,~t~!!-ttfJj fr?!i1..lp,~~';~h,~afUC q,f k~tlJ:~, approach .orth~ QAP~1 s:tig.gi~t~.4 ciJi~-t.Q';.QP¥c!}~ge; in equi~ asS,~if!1.~~'~~.t.jTi'f\,J~rjJ:hi,k.*tj11te.nt~t~ \:alu~s org~~,a~' "fe.turos alJd g.';Jy.~rn.n1en,bp.l)d:yi~lds:, .. ~a5'c~U9~ :Qc:e;n'~pd~Led' 'fi'!;ix:n:-rhe,p-ri'o,r ~,o ~q~~h,~. Exbil:>it 6:'fn.tT(}cluc~.ihtee.'adaiti'Qn:al:proxie$ [or.risk :tbe:!:Juar~e~.):' roC-d.$\lTc,ofrlsk:iprcntium,jh~i:! 'js paired 'ana. .J:.~J?rci!.~~.'\"Q~..f']~1'. ::the~:~ ~~~r1.;~Jes. eilhcr.. With inc ~\'erage ~'rilut:s 'Qf~tbe':other :vari.lb1es j;Qf :tb.e .indivld~iaiJY..'o'J <:7()1Ier;(i\'ely.,.ar:e':cofrer~f(.;d '~.Itry thc- CJu~rt~r.!,l:'9r fti,~~~~~,~;trlc t\ta~~ 1995 "q\;l~ii:erIY' risK, market premi\.ln1.:Smc~ thee.stin5iif!c'spfinipjied ypJa\ility "Pfi::lrii',J,ni ,'\~'o~uq,:t>,~, palrl:p '\\~U~ ~~craged \'3.1'~i~5,qJ' start in tv!a"i ]9"S6...:.lheexhib1t shq~"S TCSI,l1.~for .both '~SPREA1), Q\!cr i:h~ lariuirYthtouglj,:f.,.1Qr~~pl:r'!o~.To thei:n.tiresamp-lc period ana tor tIle period during \\'hicn a\:oid 'overlapping, 'ob$erva.tions for the indep~rident ,,\'e can. .i.lltfodu.ce ~i1 va.riab}e.~..:Ebtered individually 'var:i-abics.wc:use on1yc\'c-J)' tuird mal1th\Mar~h,ll!ne. ' eacp oi' ~he :~1t;~e ..'ari8blcs is.' 8i.g!:\111cantJyliw,-cd 1.0 Scf1t~1)ber,'D~I:~mb.er)iA thE:sarnplc. II,e ~i5{( pr~emi.U:m with ~he "t;.o'~ftl~i.~i1J '~j3~~g. 1he. expec.te4,s.ign. For instance.; j:n rcg:re;;sin.ri (1) th~.. co.efficieut..oo CON is -.OJ4, ...vbicn .j~ sig:t1:~nc;\I)tly .di!Jerem [f0[1.'. zero (t = -3:Su). The De,/;atj"ve co~rticil:m signal~:fh!1.{:higl1er cons\?Jl)er ~<?~~.fi.~~nc.e i$ li~,;d to a Jo\ver 1)1.~rket:p.t:elniunl. The pos;idv~ c.oe:ffict~ms ~tt ;Ii.~' r~,pphe,! in Eihib~t'1~ i-;el1Si!iv~tY':l:l1.ilysjs usin'g "qua.!'-te'f),y" Q'bSe"""'a;1'i.oI1S, :~llgge~~ iha~ dela,Y5 i,i1 upda,~i,i:igma)' pc te,s.r9nsipl~ fqr a portion, 'but Qfjtalr, of:ih~ observcd Q~gl!'(.jve re\a,lio,}s:hip',bc,twee:.n .the 1'!:i3tket-'premium ana:inicrestrit'es. ~or exll.tnple,.",,'hen qli¥tcrJy bbser~:'2tl,\jp,~.;re ~$lJ:dl'tllc .coe.fJl~i~nt -Q~i:'in ."\i'0.):..ind .'DlS.p, i!..'idi9aL~'1h~.. .(}qu1ty rj~k .pt~nl iuro '~gr~~Qri:(~) QrE~~~,i1'11"",-,5J7. weXf.~f'Jq,...,Ih~It~tlict. incr~sC'swtlh.boib J)~?rke:t~Ja'gij~ 8;nddrs:i'greel.neni '~:;~ti~n1~'~:bl.it~t.iII.$:ignjfic:Jh:lI,y~cg&Jjve,,!9. an1t:1i1g.ti.n:i:lys~. Th:e eft~t5 ()fth~ thre~ .variubtcs appc~r:. '~s ~Q~I;'i..d,itjQn~l;icS1:.'m.o.~~1ncni$,in tb.C ,PO!j:<f..isk Jaf:gcly 'i!1:!,hff~t.t~.4 .QY.aadin.g: 'O.tl1~ri\'~rl~?}:es. ror t:I'tetnJulil~$P'READ) areexamined.S1tlce:a$PRE;~DIS il~I¥C~,. jp..~~~1~.f1t~.J t.ne c.9.~mcie.r~.~OJ)q-pN and ~OhstI:u~l~it bo:n'4 yil!,~d: dn~.,1c" ' " does D,O,t , ," ,. , -""'" di I'ccll,.,.ft,otn -,., , '. D!SP .t?p~1t;(ed~~:iri'~Jgnifi~nt'~'Qd '!ir.e:~l~~r. {ti:~:agi1i tud.; 'h~Ve.'1bC;'nQle[!~;'a,I,§qi::r:f:.p6ft,j.~g:I:u'~ ,th# 'in;lY',,'{!jfe~t. to'1'ru:c_Oi.ffi~r~:i$'~~ .~ingle '\:~!!lcple. fe~re~~~Qi1s.'. . ~qtys:,~~ .,!ij;r9\\~th(9te~~$";~..e;.f;;r~~sl.on,,3',~.E~hj~i:t ,7, E\'et1 ,in: ih~. "jjreSCl1ce :of th:e '.ne\~~'fisk :v~rlabTes,. sh{)'~~~,F3~PREA'D~rshc2al1~:clY'ljl!~~.d t'o-g9,vcnim~~t .Exhibil'.~.i!101".S.that the niarkettiskprcm1.un:l :iSn.ffect~d 'rales'al1:d significa,nt~y?o;"l.;WbiJe ~b~ egu)ty pri;ITlIUfI1' by .~t~~~~:~[ tf.:l'e ~.on~!.(j.of!~~ TheJ'4.tg~ tl.e:g31Ive: i1e~4' not !'h()ve '1n',tbt' ~amt. :j:>a1te.rnas the; corporate. .", , ,, , '- '" '". c6j:.frri:leri'~ 6:1.\tbv-:e:.~mt:n.t 'i1oQ'Q "rate$:J.mpjt~s' lar~e: bgt'!~, pr~fu1i1~i1... :t~~,~!1e'ga~j've;:c{jeffi,c1~lt;!i?,..:?S P,~~P redu~ttons:in the<i:quitYptemium'~jni:crc:Slta-Qs rise, svgg:es~ 1n~~,~iJ.r.i~rli:-e:r r<:s~t~s nr,e riq~ ,due s91e111!;} aile realurc:: b-f our .data may-contr~bu.fe,to tbe observcd ','sfick1l'1~s" in. mc-!S$\1rCI1)cn1s.or D1arketr.eqi'lred retUri1s. " , ..'.. ..., . ,.-.:-,-~,,;--~-,-:- rtegnll~~'I:~!~.tJ.9n~:hip bt:-t~veeDtljl-n"(arkel r'is:k premium 3trd the }~~~l Cff.iI'!terc~t:r;1tes: ~pi=~I.f)c.!l'V:Yii! analysts are '510\,/ ~9 ~p~r~ t;lp-r}?:t.e$:iq:\1:j~lt :~(\Y/t.~ 19.i.~tast~, ehangesiri tl1~.es(tmaic'4.f; wl)J.l:ld Ijot;~(lji.t~l full)' with. changc';:rhilie intefcst rnte eY.e~;ifthetrJ.te.J::i:ik.premillm .were consh'int. ':{'o.address:tl¥e .The resl;J1ti'i'n ,ExhJ'b1t:7 S,llg ~st that 111ein,~erse relaiiQrls1'iI'p he'tVr-eenj'l1i.ere&tfUiCS andihe..murkei'rlsk ' -"', , . Qr:~m:i~~1 i!:ay Ijd~ b.~ ~~ pron-o~rtt~d ~s ~J1tgest~9: 'in, 't.:ailic--fe~hlb,its. 'S(l~,:I:~ete ,:~ppca['s t~ 1;3::= F\:~ignlfiy:~b't, 1:I~"g;itiv,e,link ,bet\"~eil the equity ,rjsk' 'pt~rt1ium apd goveTn~t1\ ipleJ:es~, rates, TIle ql,lnrt~:rty resIi1ts:: ,iT}. Eihtb~t l' ~"OlJ .HA.~R(~ ~B$PREAP .311: ~~~TPr)!-1JfE,.t'!1f..;R~~.~~~r~EMIU,M 'Exhibit 7. :Regre$sionsUsing 1Q~e~b(b,n Re,portif:19 ofi;!u~rJYJ: ,ponds. i,r-t?:r feF.-~.r!~ ~a9s'inA.n~)y~t~' reg~s!!i&\, to tort~qt.~c;:.r .t?qe:~cJ~n:ts:{i,-'~'~arucs). f.~re(::,af-~s '~rg~jon. ~~ti~ai~~ 1,l~.E!clI ~~lhe ~'pfc.a"d:~!\y.ee,!! y\~lg~ ti.u'~o~Dr~c~~J~~.,.B"S~.,Rf;AP tl'lls .lhc:nsk'prcmilim.o" .!.he UP PUl'pOs s.QJ.ih~ regre$sion.~~ri~blc:s ~-~~ .sol> in"c:'!.. :I:n,e:)ictd ~~ ~xp;r:essed in .~., ' --~---" .."~- F..qt1irYlliSk'Pre~(jm\rj~)' Moiilblv .Ob$Co~;tiuns 1~~(cept ..0002 :, '.ixxI'2 .." g~~oI?'19ID.~Q.(po.i1~S ..12),. .. -.521 (~,:;9) ( -.o.:-j 8). '::~1 ...z47 obsc:r::,-;1tlOIlS W8CL'QUJlt fot ~.~ (m;.o.l1(h!>, go,,'eI:t1t)J,~,( i~ denQJed, D~ .. /, 1:1i.3:7) .{s:a!!1e;~~.T :;'bl~\1 _cban~es o~J~iig..t~~:~9fp,Qj~1~ -:149 (~1.1f1 f2} &!ui~:I"ffi;ikPremiumir,,:J .'. "Quil1erlY"'DD~p~~rj(lj:.'Ping. yp..!3l;Jlc~.c.),"pr.c~~d~ t<;i n)..~t'1ltilj' Q?,161}$.~~iltI dec.fm;jJfotm.:(~.g.;.11o/~~ .' ~t?~pendei'!t:Yaria!;:!te .(t}' , ;j~ Alternate.Me:as~res of~!.$~.J:3r~!p.!~ ~qAl:!aly~e ;'fQfen.~I~JEffec~$ tif' Ad..~ .;q2 . .4S~: .59' (4.:94) _5.';0 .60 "£2.1Q): 1~~l~~.:J)~~'1'::P(Jrii!1g :(3), C.orpo~le.Boj1d";$preadl"BSPRE.~D) ..r-1qilth1.yO\,)~~ohs ... ,,'--_, . :t.1~) -f129j ., H__~__',~ . i~.' ,pa~l.. :u:t;4e'1'..Jji_ng ch!l.ngc$ .in the ~c9/1ornlc ~n_iiron.~n1. ~1:o'reo\'er, -ea-ch of the risk lT1easurcs 3ppcnrs:..tu'co~aj!l'relevant. f rifotlnation:ror inVesto~. of .c;qui~~re'tu rr.s imp! ied by .pI?tiQos;da~.a.The signj.ticnnt , ... t:conomfu1ink5..belWc"e:n1hem~rt(et pre!1T!,!l1I.and a .Wi,4~ .~rt~-.o:t fisk:Y.~.!1.t!:~r~~:&iJgge,Sts:.~11~~:.th~ :.i1c,9tio1'\ 9r.~ i'he m'4i:if.eit .rys:kpr:emium)s: ~ega.li\¥ry ({lRt~4 .t~~h;~. co.lj~fai1t. ~~"k':P~Ei~"tj!!i: :o:"r.*t tif}1~:j:s no.t,;~ ud~!!,t~ 9t'Pti.c:j:ng,jfi~quity .ve~s dep.tmark~. , .~.~~;t\of:,-~n~L,(m.~~'-.c;'9:~.fid~n~.~!\'~PQ~.i.t.i\'~1.y'ij.li~~d roo .'e:."1'1~ri:~~f;Jb :~'6:~~-r:e$(.r~~..~..s,f>r.ei.d~ "~c::t.\Ye.e-n.<:orpp{n.t;e' ~l1.a .gQY.ef~~t.~~ .de"b.t,:~i~gI:e~.~Qta!wng nI).~):"S~.it)lheir fore~~as{srif earnIngs iro'~... andopli.o:ns. the.klpll~d ~laullty. :.o:f.cq\Jit~~1:i\~ a~ '. f~ve~leq111 data;; :Y. C~ri*1f:i~iQ~$ 1;11~c:.res~1t:$p~,,~~1 tT1 pli-ca,l.fon~ ,for procti.ce: Firs:t} at'leas_!: PI1 :.1y,eT~ge~~.tne .estimates. su.gg.est' a mat~e~ 'pten1if!_~'~~,,:!~1~.ly~~.~p.ariQ1~ ~§ tl:jn,g~te_f:i.!1 hi~f9(;;*-a:l 5:pf~.*~s 1n T:~.tJ;J~ ~~t~'-e;~ s-(O-~~5~.t'1~'bonds, Our ,CQt}ji.pttlr~ i-sth~~ tf rti;i)1hj!ig, -tT1~esiimates are on:the hig~\ side aarl itnils:es-(ablish :10 'Irpper :oound on ,the market prenlium:.Second, il1e: res-1i11ssli~es1. ". ','.. " ih~il.l~e . .sh~!:rQid.er ~1!i!"e:drate.s.:of ~~m and risk premi-a, n.f:a :~b~Sta!1~!ij;}I:,:1'.I.:.e~1~ ~'lifJ- n.ot f~[y cap,t;i.!.~ ,'Should h,c. based ,on tbcorlcs -a.'bout .investors" t.hah,g:_es:,~il:!~e$"_(9,r,~fn:.iequir,~IP~Qts,._A's s.'sp~c;j,t}~ e::t~inpJe:.'o\lrfinQmg$: wdi~te.tha(:.c:o:mmon appl ic~tlQn expectati:ons lor Ilow~Y~r, risk , '/. ,.,' the future. lit pracl'(ce. ' pr~mia':.a'~~ t>-pically 'esl,il:J:iat,e.cJ, u§mg ,\~i:rnges of or 111QQctsSll~~- $5 :i~ C,APM 'rvin b\'et:~tc chat)ge.~ li.ist.oric~I returns. ,-r:h.~p?per a'I:JpJresan ,~lter!late. il] suareho-ldcrr,elur:n requirements ",hen .gO\!crnment approac;b. to' esi.imati.ng r.i$.k pr:i:nl:~" that e1J1p 19Y5 il\terest ra,tes. chan;ge.. 'Rath"e.r t11an Ii ,one-for-.one: pub-JiG\Y' avail!1,ble e.xpec,tational'd3ta. the resultant ch~!1ge w.itb j~~~J:'csi.!I1tcs 1mpiie::a .~:j'.li!!;C of coo'stant 'averagc markefeqult)' risk prem!um.o\'er:g'Ove1nn.)~nt ri,s'k pt.en1iuh1,.t~e re'sU:~r~~dic8t~ ~h~t e,quity recj~,l:e9 D~~ds is' con\p:;rab1e in ma,'ghitu~e t.u IQJ:lg-term r~!utns fPf a"~~ge risk stpc\~s (tkcly cl1ange .by helf dixie-fences(1926 to 1998)ill histeri,cal re"t1clrn;5,bet\veen(~orless) orth~ cnaugeJ11 mtcrest ratcs.1::1owever. tJie' 's1".o~ks ~ri'd bonds. As a result, our:1:vfdc.nce.doesnot picture is COli.slaer~b1Ymql:e'ton~.pJi'Cat~'d:as shuwn,~~ linkageS: bctwccj1 th~: risk premilli11nnd "ot.!1er. r~s91vethe equjty p1'~m.iua1 p1.IZJ.le;.rather"tbercS'nlts 'the .~1,rib1,l~es9f,risk" ' suggestinvestori stifl expect to recci..'e large spre~ds Ultimately, our resC1lr"h aot:5 no.t rcso!~c thc Rn-s'Ycr l1).in"esI in eq\uty verSus;debt il:\$trumei1ts. Thcre is slrong eviden('ce.ho\.,;ey~:r.that the .ma.ket to -the question "'Vbat is tn,e 'tight m.:lrk~t'.risk our w-ork ri.sk pr~pium chaJlgeS over time. Moreov-er, thcsc pr'eriiiu,m"'" ,Pcrba~$- mQJ:e importnnity. :i:ha.nges: ~ppear,Jinked lo the If:vel 01 interest; ralf:J as suggcst~ tll-a( the ~Ii$w.er is .condilional on :I number not an absolute. We hope ",'ell ;ISex antI! pro~ies for risk drawn.from mterc:;tratc or fcaiures iD_th~ economy that future research \\~11harttcss ~x tilil.. da,ta1.0proYld~ ~preads in the bond marl'et.,.co,n5un:t~rcontldence ill pracri~t ill using a Tna.rket f'utl1re ec.ol1omic conditions, disag,reel'tlent nlnong. actditj9ua[ guid~nce ro..becS:t pl',emiutn tQ in:l~roye'fina~al decisions.,. .fin~ncia1~11,tIYS1S in their f6reCB.s.ts :and the ;;ola~ility .(:3rJCtt)~.. r~:~~; ~. ..~,,~: 1.6 ~OURNAl OF ApPUEO 'FINANCE. 2001 R~f~rer1c~$ ~~I,r:::t$, 45., .7~Qo."$If?t:ks".~rS\l.S :B~n.ds:..I.!~f~i!!ingibl: H;\.TTi~;'R. 1111,0 f. 1Ylar.to.n;.;.i99~. ':Eli,t.i~ti!1g S.p.~oldl:r :Risk Prer:ni:r .t.is1,n~ A n~ly&j'.s.' Gt'9.,~til ff\~c:c;as.t§," F!nan:clr.l E"qt!n;.:Risk h-emium..i. Fii".nr::j,,{ ;f1lf:ljI.lt3 )o~lr/la.} $.6"""(N,"o, 2;}1ilJ'1?h/.~pri1); 9~-1L). .. ,,\1011°$11'""1':,11 (No, .2. S\lJmm.~).63:70. ,Baecc1, 1\:,,11.,1991. ,..t-h:c I:n,i:crrnlttjol\ :CQ'n,t~nt ~f :F111~'i1ci~.I \'\ii;:1..'oSt$" " rOre(;asts: Sbort-tci'in , " \'s. !:.ong-td1;I," ;.--,', Uui1o-ert.itv , " ",' ': o.r~ot:,b ,CllcrO'lill:J.:\1 'Cbap~1 H\II. Di~~t=rt3~i~!l', Unr:;',~rsi,ty Mlcrol'ilms lntcm"ti,or.a! ordC'r' I~U1l1b<=f '920193,6., B1,)e~~t.R.E., tv1.N,. Gillt::kin and 'R,S. :I-!,~Tris. 1,99.3;',MfiJ ncial :"\r,alysts' forccnst of Corp'ntlile -F.aroil\gs' (11'O\\.~-h: T(Jp .Pc:\yn ":t:rslif '~911om Up,.." il1 !(an.4!>o!J.K_.Qj ,S"~c.'i:!it)-' A.~a(;:.,:{ Fofi:ca;r'ing ODd As.tef Ali"c-oI,lpfl. Jo!'~ B.' C.1uefiltl:!,)r, anI! ,Mu;!;~r~N'..Gl!.litck,in ('t:ds.). r..()ndon.'JAll'"c~s;.:18S-191, .Brigham. Do, D. Shamc, and S. Villwn. 19~5~ ."The: R1Sk P~e.mium Approach to ~fellsi1.ri,og fl. Ut~lity"s Cost or \ .F.~uit~." Ftt!.aIJ:ci!;t Aftlrtag.-m..r;l 14 ("MQ.I. 'Sp~.i~g). ~j4i. .giq,w.n. L;D.. ] 9;~3, " E~.rni os,o f"rec~tiJJ;~ ..Ror:s~:rrcli: .1ts t"\1:bl'!~Oli;'.~~(}'i1iic~. I!lt.. I ~n pi1.s1 of Cup.fl!1.1, Q"liJrr~,.I.r, ,t998-"I-:earb(Iok.. . ff,hot.{)~ AiS..,t.'iDt~...$.. l!1c'...1997 Sic£~'.. iqn.i1.r. pilloso.qlld h~'l(J;lo.ItJ '1997 Ycsrbcok. Johnston;~.; 1984, F:,..,no!j)i'~ricMi!(jiods..1:'cw"I::~i~,~1cGr'~;\"Hill, ),.( cr,f"l:ieil: Keilnei.iy, 'P., 1~~f;3,.-1 GuT,t/! ro.£Ccl/-ol!!e:rjcs. C3~1'ridl!':. .f'rcss;.2°/ ediuotl. ~~lT La.mdln, .D~. 2001. ..Estrmating Ihl: Cost ,Q-f Eq~ity :tQf t,Qrporlll!On~ rhat ~~pi!.r.ch~st;: Ttletiry IInd. .~p'pjl~i(qrl,"1;"gill"~rin¥.Ecpngm/$(.46 (~. )).. 53-63., lmpli.O:'r;uo.Qs;for C.n.l>i~llvl:tt:~et::RC&~~co;" hli.en:atianpl Journa! of Fct"ecri.../ilig .9 CND. :1. NoY~mtJr:r}..'1..95~:320. MA,d311:i. Q.s., 1917. $coli.f?/tfcrr.:i',t.. f'i'cw .YorK, 1i.~cOrDw.;~fill~ Srp\,-Qk L;D..- [9.~7. "1\.1\1\.lys.1"F9.r:e;~as.i~:~C:.J:or~,::.'\~d;jtiQn,lIi Eviil~J'I-ce," l'i;;-iltitlqf An(lly..r.1S Jtj:urilClI S3 ~l'Io. (i, N.ov:eri:11?,cr!p~Ii~;II1';1cr). 81-99. -- M~Jkiel. fI... 1979, "Tbe:'Ctlp~rili Fbrma!iC1:t.Pr1:bTl:m in iJj'c: ~nil";;d ..Sint=~,'" .Jour1ji2,lpI Fi.ii{!!!t;,c .14 (NQ_;~.. ~:IlY}. 2,91. ,~.O6.. . Bnin(ir. R.F.~ K. Ead.:.<. R.-Harr;s :ltld R.. t-f;tgjn!~ 1_99_~~'l"!CSt P'r;1~il~~ f~ -~~ti!i1Biil\g -1h:c ~'!tt 01' c;nj)~tAI: .s1J_~~Y ~"t! S~in\l1~.i.s.". F~i~(1f'Clal .Pri2l.'rice li-nl!f;d!i-~aliQ/r 8 ~9. I, _S~ri:I~'(S~'mme;t)i '1~3.1.&,~. .. ~a1ki.cf, ~.. 1982,. MRr.s\c;..an<l "Return: A Nt'\;,. L.o",>J-, ,. i!l Th.. Ck1'hI$Iir$ Role.c.fDt!$( QndEqUlfJ.~ in. Fin,:1(cin~ .fJ!;.C';'!!irq/:: Foi'lii.i1:{to~. I3.B. Prj-e,ilm:lu.{ed.l. Na.t;oua"J :Bbrr:nu .(n ~Ecl>l\om!c Rc~c~rch,.C!uc~go.:lJ!1Mr?i!y O"[.~i't:ago Pie.:s~. W.t.-t.~ J. J.,akonis.b\)k;, j9~. ..~Ri~k-at!'d,!ot,clurn on J;qjjjry{ Th~ .Use ~ild 'Mij;ils~ :(l'r Historical cstin1~t!:~," FitIt:JJcia( A11a1.v.rll JOIIT~ljl/ 41, iNo", I.. January7.FebruUl)'), 38.,'47. ' Cli:.p, J;.. r. ~fa!Ti~9;,~iji! J,' Lakoni,sh.ok,.i"99'."1un~amr:nt:l.1 lI_n,a S'tl)ck RctUfl!S in' JQPl1n,~ JaJlrnlii uJ Fiti:i~e:. 46 "(No. ,~i qecem9c::)11j9-64. ... t.1n:~~t\, ~.,.R.. I:!am.s,D~.4r. :C_~,!~r.d.~99:2.."'.F.l~K ~d Rc~u~ :11)f.~U\iy; ~3rkels.: ~yj:ile.nce..:U:S:~;1g ~fin311~i~I~An3.tyst~' tarccrisL";." in..FJclidbcal of S't:::uri!y .!.nul.vsti'-"Foncanblg and A.r.~l A!lrcarion-,: 1.;.yu;~ard" :Ilia -M. G~.lt~iTl 5~.d5:}. Gr~':I1'?o'icb, ~:T. JA[_Pre$!, 1~1_,.~22, .-, f\:Jiirs(t:fIj, r. and~. 1.iarrt~.llf!i3,.'~isk, Return, ~Il9Equitioiium: A. R~:visj( Using Exp.~C;\J!4 ~~tLiin5:' f-i"'::Ii?i~tfi",.1.r;..', 28 , .(N(I, 1, February). ..' '.' " c'r.1g"g,.). ,in\! B.p. t.1alkiel. 1981. -E.:.i:perturiallsand Ih.? SIi"U("h!Ff of ."h(1r~ 'P,.lcl'.', Nationai BU1""8U Or£~OJII)II).ir; P.i:SC3TCIi. "CflicagC!,L'niv-::n;ity of Chtcsgo PT~SS..' G~ldm'~n5achs, 1999, £~'..I CQ/rIpdnyAI1d.~I'si..;; ~J:lI1USfY}. Goyal. ,".. tlnd I. W~I,;h. 1,999, "Prtdj~1illg Prcriiium," AlJdersolJ Grlldu:lle Lhc tq~iry Scb,'J61 o-r r,1:1nagern.:nt at :UQLA (A"ugo,~r14}I{nrri~. 1{.. ) 98b. .Uslng ;,;l~S(:{.J.. 1q99; ~nlc:'Sb,'in1;jn~E~itr ?remiumj".Th..oJalJrn(;' o~(1;~~rtf;~in Ma/l~emoen/ (Fall). I(i.17. S.ic:,g,eJ. J.. ;londR. Th:llcr, 1997. "Anomnlic:sy :Tbr: E{luity Pftm!1.!iI! PU?:J.\I:..",1ti°llohrard{ .E.t::onQlnlCf~ript'tl!vc,~. (No.o to, Wi"ler). \'anderV,'tlde. J. nod W.T. CDrlc\o~. 198R. "fn~'e'Sotar Gr~wth EJi.pccla-tia!ts:An:llysls vs. 1i{fSlOry."Jullr"o'!i (if P"r~ro~;o 0 ',\.(Qnf1$I'VU"li AIII1I)'5\5' 0.0'.\(11\ FQre'ca~tS Ie ESlimuteS}\:lrchold~r Rt"quircd Ralt"1'of Relurn," Fi"L/ll("lal ,~1.7!Il!g<:n;el'f15 INo. t. ~pril1~). 58-.67:. i] 191-'2~t:I. (SpTin1!~, 78-82. 0 °Wl:lch,I.. 2i){)O.-Vil:w.~ of Fi"3nci3\ Ec()!1om!sul'n Ihe I::quity Pc~mium IInd on Profession:!1 ("ot1tro"l:rs.i~~.~ )rlllrrJtJ' oj ';::?$iJ1':'" 73 {N". 4. Oct",ber}, 301..537.