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'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$tors emp:~6J:fina.ric1.a1 ',c;ha~¥e:.ov.ertj~e,
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{r~,me,)\~Qt:ks: to ~r)al)-"Z.e c,orporiate ,U,I'!.q;!n'~..e:;'i1f~i}~
.Thls '~a~e~ tak~s. nn.a1{~rn;l}e. ~?'Pr..,~.((h py ~~1n~,
pertormanc'e.
Fo.~ inst~,=e.
the'inc,ic4St."l1
use oof
:~~p~c~tj{)onal dntn:to estImate th~ m1lcrKetnsk ~rem~~.
Et;onoini<;; Vt11u~ ~dde.d o(EVJ:\~) to n~s.es;<;':corp61'liioC Tf1~ ~~pr~~ch. ?~& :~:~ ,:rn~Jo't, ad.~:~nt;lg,e:s. r~r
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b~~.W.t;C;n
.the fisk; p;remiliin tib.d. Iou.(' c,r..
;a.f:rfe'~:~s:ilies :6f r.is1~ :ih.e ~pre.ad. bct\vccn }'jel~s on.
:corpordtc..and ~UVemmei1lbbfia5,
~CtI'15U.nie'r.s~i1liDlent
9b°t.it- f~t~:~-~<?P~t!~~~c t;.O.!l~it.IOJJ'~;:ih.e
p:~:ej~ie .i~.t!
:~r q1spty:s.ic.1j "a~:t:.O_$:~
.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:
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in~::estfi.i~:nf.s
it
;~s
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.( 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
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,J,O,URNALOF :APP,LI:ED
R,~A~.~.E,--- 2,CiQ1-,
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.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$ts,.' ~;i3.~S re.."q'\les.~s....tl:1e'
-4.i.yi'd~.4.~j~1.~. fepOrted ,!'t!~qe Jf'g(Z~t!:~~ Jq:ip"n'a
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RISKP.REMJUM
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p~fJnjtions:
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ra.ter:,~um.
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~' c""'~-'~..-!
=
f(i~e ?cr ~&:{~.
~
~p~,~!:t\ c!i:\'id~.d per &!i:1r1:
meas~red:l$ CL/::tent
il1l:il~;r;~ :u1nu'II.
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=
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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.
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