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Abstract
This research investigates a new method for estimating the price of risk in the market using information on bond yield spreads. An empirical examination of the model indicates the ex-ante risk premium estimates, which vary significantly over time, have an average one-to-one relationship with future market returns. There is strong evidence that the procedure supplies forecasts that can be very useful in predicting future returns on stocks, high-yield bonds, and the overall market. It may therefore also assist in estimating the required return on assets needed to compute the present value of investments.
TOPICS: Fixed income and structured finance, factors, risk premia
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Estimates of the Market Risk Premium
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