The Equity Risk Premium Amid a Global Financial Crisis

The study re‐investigates the existence of the Uncovered interest parity (UIP) hypothesis and substantially adds to the literature by offering the most recent evidence during the period from 2000 to 2022 from developing and emerging economies. The study further augments the literature by extending the standard UIP hypothesis to account for the monetary policy stance and risk premium. The estimates of nonlinear autoregressive distributed lag (NARDL) and component generalised autoregressive conditional heteroscedasticity (C‐GARCH) show that the UIP hypothesis does not exist in any of the BRICS economies. Nevertheless, after accounting for the risk premium and monetary policy stance using inflation levels, the interest rate differential significantly and positively influences the expected changes in the spot exchange rates. This indicates three important aspects: first, the necessity of risk premium to make up for the higher risk that comes with holding the foreign bond for the benefit of domestic investors. Second that the UIP puzzle does not hold, such that higher interest differential depreciates the domestic currency. Third, the analysis underscores the substantial and direct impact of US inflation level, particularly for Brazil, Russia and India, in determining the changes in the spot exchange rate. These insights hold crucial implications for policymakers and regulators.

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Presidential Address: Corporate Finance and Reality

Graham¹

2022

The Journal of Finance

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This paper uses surveys to document CFO perspectives on corporate planning, investment, capital structure, payout, and shareholder versus stakeholder focus. Comparing policy decisions today to those 20 years ago, I find that companies employ decision rules that are conservative, sticky, and geared to time the market; rely on internal forecasts that are miscalibrated and considered reliable only two years ahead; and emphasize corporate objectives that focus increasingly on stakeholders and revenues. These practice of corporate finance themes can discipline academic models toward better explaining outcomes. Models of satisficing decision-making or costly managerial biases align with many of the themes.

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The Equity Risk Premium Amid a Global Financial Crisis

Cited by 4 publications

References 20 publications

The effect of interconnectivity on stock returns during the Global Financial Crisis

The effect of interconnectivity on stock returns during the Global Financial Crisis

Re‐Investigating the UIP Hypothesis: Recent Evidence From BRICS Economies

Presidential Address: Corporate Finance and Reality

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