Investors accept that there is uncertainty, or risk, associated with equity investment returns. Consequently, equities are normally priced so that they provide a premium to the returns available on risk-free investments. Equity returns, however, are cyclical. There can be long periods when equity returns greatly exceed risk-free returns; there can be long periods when the premium disappears altogether. This thesis explores the influences and driving forces in equity markets, with a particular emphasis on the UK equity market. Both rational and irrational influences are examined and discussed. A General Literature Review examines the general progression in academic thinking in the area of equity pricing over four decades and takes a close look at the concepts of market efficiency and the challenges mounted by behavioural finance. The “equity risk premium puzzle” is also examined. Chapters 3 to 6 contain empirical studies of the variation in UK equity returns over time from four angles. The chapters look, respectively, at: macro-economic influences on the equity market; the relationship between equity returns and market volatility; the impact of variation in risk-free returns; a full decomposition of both ex-ante and ex-post equity returns. Reassuringly, the results confirm that the UK equity market is driven, in the main, by economic factors. However, the results also indicate that the full set of influences on the equity market is complex. The analyses undertaken suggest that significant swings occur in the risk premium element of expected equity returns. The results also suggest that there are periods when the UK equity market may be in disequilibrium with other financial markets. It is not the contention that many of the puzzles that have confronted equity market researchers over recent decades are now resolved by the analyses undertaken and presented in this thesis. It is to be hoped, however, that a useful platform has been built from which further investigation and analysis can be taken forward. In particular, it is suggested that comprehensive surveys of long-term expectations could lead to a better understanding of equity market mechanisms.

<p>This dissertation explores issues regarding the short-lived temporal variation of the equity risk premium. In the past decade, the equity risk premium puzzle is resolved by many competing consumption-based asset pricing models. However, before \cite{btz:vrp:rfs}, the return predictability as an outcome of such models has limited empirical support in the short-run. Nowadays, there has been a consensus of the literature that the short-run equity return's predictability is intimately linked with the variance risk premium---the difference between options-implied and actual realized variation measures.</p><p>In this work, I continue to argue the importance of the short-lived components in the equity risk premium. Specifically, I first provide simulation evidence of the strong return predictability based on the variance risk premium in the U.S. aggregate market, and document new empirical findings in the international setting. Then I attempt to use a structural macro-finance model to guide through the predictability estimation with much more efficiency gain. Finally I decompose the equity risk premium into two short-lived parts --- tail risk and diffusive risk --- and propose a semi-parametric estimation method for each part. The results are arranged in the following order.</p><p>Chapter 1 of the dissertation is co-authored with Tim Bollerslev, James Marrone and Hao Zhou. In this chapter, we demonstrate that statistical finite sample biases cannot ``explain'' this apparent predictability in U.S. market based on variance risk premium. Further corroborating the existing evidence of the U.S., we show that country specific regressions for France, Germany, Japan, Switzerland, the Netherlands, Belgium and the U.K. result in quite similar patterns. Defining a ``global'' variance risk premium, we uncover even stronger predictability and almost identical cross-country patterns through the use of panel regressions. </p><p>Chapter 2 of the dissertation is co-authored with Tim Bollerslev and Hao Zhou. In this chapter, we examine the joint predictability of return and cash flow within a present value framework, by imposing the implications from a long-run risk model that allow for both time-varying volatility and volatility uncertainty. We provide new evidences that the expected return variation and the variance risk premium positively forecast both short-horizon returns \textit{and} dividend growth rates. We also confirm that dividend yield positively forecasts long-horizon returns, but that it does not help in forecasting dividend growth rates. Our equilibrium-based ``structural'' factor GARCH model permits much more accurate inference than %the reduced form VAR and</p><p>univariate regression procedures traditionally employed in the literature. The model also allows for the direct estimation of the underlying economic mechanisms, including a new volatility leverage effect, the persistence of the latent long-run growth component and the two latent volatility factors, as well as the contemporaneous impacts of the underlying ``structural'' shocks.</p><p>In Chapter 3 of the dissertation, I develop a new semi-parametric estimation method based on an extended ICAPM dynamic model incorporating jump tails. The model allows for time-varying, asymmetric jump size distributions and a self-exciting jump intensity process while avoiding commonly used but restrictive affine assumptions on the relationship between jump intensity and volatility. The estimated model implies that the average annual jump risk premium is 6.75\%. The model-implied jump risk premium also has strong explanatory power for short-to-medium run aggregate market returns. Empirically, I present new estimates of the model based equity risk premia of so-called "Small-Big", "Value-Growth" and "Winners-Losers" portfolios. Further, I find that they are all time-varying and all crashed in the 2008 financial crisis. Additionally, both the jump and volatility components of equity risk premia are especially important for the "Winners-Losers" portfolio.</p> / Dissertation

This thesis seeks to address three important issues relating to the efficient functioning of the Istanbul Stock Exchange. In particular the thesis seeks to answer the following questions 1. What makes markets informationally efficient or inefficient? 2. Has increased stock market volatility had an impact on the equity risk premium and the cost of equity capital to firms? and 3. How is it possible to reconcile the view that markets are weak form efficient and technical analysis is a pervasive activity in such markets? Unlike previous studies, this thesis seeks to examine the issue of efficiency when institutional features specific to the market under investigation are taken into account. Specifically, the thesis adopts a testing methodology which enables us to recognize possible non-linear behaviour, thin trading and institutional changes in testing market efficiency. The results from this investigation show that informationally efficient markets are brought about by improving liquidity, ensuring that investors have access to high quality and reliable information and minimising the institutional restrictions on trading. In addition, the results suggest that emerging markets may initially be characterised as inefficient but over time, with the right regulatory framework, will develop into efficient and effective markets. The second important issue to be examined in this thesis concerns the impact of regulatory changes on market volatility and the cost of equity capital to firms. It is not sufficient to simply examine whether volatility has increased following a fmancial market innovation such as changes in regulation. Rather, it is necessary to investigate why volatility has changed, if it has changed, and the impact of such a change on the equity risk premium and the cost of equity capital to firms. Only then can inferences be drawn about the desirability or otherwise of innovations which bring about increases in volatility. Surprisingly, these issues have not been addressed in the literature. The evidence presented here suggests that the innovations which have taken place in the ISE have increased volatility, but also improved the pricing efficiency of the market and reduced the cost of equity capital to firms. Finally, the thesis tries to identify the conditions under which weak-form efficiency is consistent with technical analysis. It is shown that this paradox can be explained if adjustments to information are not immediate, such that market statistics, in particular statistics on trading volume contain information not impounded in current prices. In this context technical analysis on volume can be viewed as part of the process by which traders learn about fundamentals. Therefore, the thesis investigates the issue whether studying the joint dynamics of stock prices and trading volume can be used to predict weakly efficient stock prices. In summary, the findings of this thesis will be of interest to international investors, stock market regulators, firms raising funds from stock markets and participants in emerging capital markets in general. The implication of the results presented here is that informational efficient emerging markets are brought about by improving liquidity, ensuring that investors have access to high quality and reliable information and minimising the institutional restrictions on trading. In addition, the evolution in the regulatory framework of, and knowledge and awareness of investors in, emerging markets may mean that they will initially be characterised by inefficiency, but over time will develop into informational efficient and effectively functioning markets which allocate resources efficiently. In addition, the results of this thesis have important implications, for emerging markets in general, in identifying the regulatory framework that will achieve efficient pricing and a reduction in the cost of equity capital to firms operating in the economy.

[pt] O Equity Premium Puzzle tem sido muito estudado no mundo desde 1985, ano da publicação do trabalho de Mehra e Prescott. O intuito desta dissertação foi fazer uma análise e avaliação do Equity Premium Puzzle utilizando diferentes contextos vividos na economia brasileira no período de 1990 até 2005. O modelo utilizado foi o do agente representativo com utilidade separável no tempo desenvolvido por Mehra e Prescott (1985). A fim de realizar comparações de resultados foi utilizado também o modelo revisado por Mehra (2003) e um modelo com utilidade tipo Kreps - Porteus com processo de dotação seguindo a cadeia de Markov. / [en] The Equity Premium Puzzle has been very studied in the world since 1985, year of the publication of the work of Mehra and Prescott. The intention of this dissertation was to make an analysis and valuation of the Equity Premium Puzzle being used different contexts lived in the Brazilian economy in the period of 1990 up to 2005. It was used the representative agent model with separable utility in the time developed for Mehra and the Prescott (1985). In order to carry through comparisons of results was used also the model revised for Mehra (2003) and a model with utility type Kreps - Porteus with endowment process having followed the Markov´s chain.

[pt] O presente estudo analisa a relação entre as variáveis Book-to-Market, risco de falência e retornos no mercado acionário brasileiro para um total de 168 firmas da Bovespa no período de Julho 2009 até Junho 2014. Os resultados demonstram que na medida em que a probabilidade de falência e o Book-to-Market aumentam, as empresas brasileiras pagam um prêmio de risco maior. Apesar disto, o fator Book-to-Market quando analisado separadamente, não consegue mostrar uma relação direta com o prêmio de risco, isto é, empresas com alto Book-to-Market (empresas de valor) não necessariamente pagam retornos maiores que as empresas com baixo Book-to-Market (empresas de crescimento). Isto contraria estudos feitos em mercados financeiros desenvolvidos, onde tal relação é estatisticamente significante. / [en] This study analyzes the relationship between the variables Book-to-Market, bankruptcy risk and returns in the Brazilian stock market for a total of 168 Bovespa firms in the period from July 2009 to June 2014. The results demonstrate that as the probability of failure and the Book-to-Market increase, Brazilian companies pay a higher risk premium. Despite this, it was found that the Book-to- Market factor when analyzed separately, is not able to show a direct relationship to the risk premium, that is companies with high Book-to-Market (value companies) do not necessarily pay higher returns than companies with low Bookto- Market (growth companies). This contradicts previous studies done in developed financial markets, where such relationship is statistically significant.

[pt] A modelagem da estrutura a termo de juros tem atraído atenção crescente de pesquisadores e profissionais de mercado ao longo dos últimos anos, por seu papel central em Finanças como balizadora do custo de capital. A oferta de produtos atrelados à dinâmica de juros vem evoluindo continuamente, tanto em volumes negociados quanto em sofisticação das estruturas, sendo acompanhada por modelos cada vez mais complexos de análise e apreçamento. A alta dimensionalidade do objeto de estudo exige o uso de um ferramental matemático bastante desenvolvido e diferente do utilizado para a análise de outros ativos (ações, por exemplo). Como resultado, temos diversos modelos de curva, não necessariamente reconciliáveis sob um quadro teórico unificado, e alguns eventualmente distantes da prática de mercados específicos. No Brasil o problema de avaliação da ETTJ é ainda mais complexo, tanto pelo rápido amadurecimento do mercado de renda fixa nos últimos dez anos, quanto pela herança de sua evolução histórica, ainda presente nas funções de resposta dos agentes locais. Possivelmente, a maior distorção do ambiente econômico-financeiro brasileiro seja o nível extremamente alto das taxas de juros de curto prazo, apesar dos avanços estruturais recentes. A disparidade em relação às taxas praticadas em economias desenvolvidas - ou mesmo em comparação a mercados emergentes com níveis similares de risco soberano – cria uma série de disfunções que afetam virtualmente todos os segmentos da economia real. O objetivo desta Tese foi mapear (e utilizar para apreçamento de ativos e derivativos) algumas particularidades de comportamento da ETTJ brasileira, eventualmente não compartilhadas por curvas de outras economias, portanto usando uma abordagem relativamente segregada das principais correntes de pesquisa em modelagem de renda fixa. O trabalho está dividido em duas fases: a primeira exploratória, através da aplicação de técnicas de estatística multivariada, Teoria de Carteiras e instrumentos de avaliação de risco para traçar a evolução histórica da curva de juros brasileira e seus prêmios e preços de risco associados a fatores endógenos e exógenos. A segunda parte da pesquisa faz uso das evidências estatísticas levantadas, incorporando-as a priori em um modelo semiparamétrico de apreçamento de derivativos, combinando elementos básicos de Teoria da Informação. Sua aderência e representatividade foram testadas sobre uma ampla base de opções de futuros de DI, sendo comparadas aos resultados de um modelo tradicional de mercado (BGM). A Tese conclui que a dinâmica da ETTJ brasileira entre 2001 e 2010 deve incorporar no seu processo de modelagem uma perspectiva histórica de percepção de riscos, aproximando a relação entre abordagens clássicas de apreçamento e a prática corrente dos agentes locais. / [en] Modeling the term-structure movements of interest rates is a task that has been attracting a crescent number of researchers and practitioners in quantitative finance, given its importance as the main driver for the economic cost of capital. The volume of traded interest rate sensitive assets and derivatives has grown significantly over the last few years, followed by increasingly complex models of pricing and analysis. The high dimensionality of the object of study requires the use of mathematical tools quite different from standard stock market models, resulting in several approaches that eventually lack a unified framework, flexible enough to capture the dynamics of some particular markets. In Brazil the yield curve analysis is even more complex, due to the fast increase of fixed income products over the last ten years, and the historical shifts in the monetary policy conduction. The risk premium in the Brazilian term-structure of interest rates is partially driven by some specific defensive behavior, following past monetary decisions. Until 2008, the Brazilian Central Bank has primarily dealt with domestic and external crises by raising the short term rate to restrain capital outflows, generating a well-known asymmetry in the market’s response functions to risk aversion. Therefore, the traditional parameterization of risk based on mean and variance estimators fails to capture the market price of risk assigned to higher order moments of bond returns across several maturities. The main purpose of this thesis was to get a broad picture of the singularities of the Brazilian term-structure dynamics, and use it to propose alternative approaches to interest rate derivatives pricing – particularly, embodying the third and fourth (pseudo) moments of bond returns into the modeling cycle. The work is divided in two parts: the first exploratory, applying multivariate statistics, portfolio theory and risk management tools to trace the historical evolution of the Brazilian yield curve, and plot the timeline of risk premia and prices of risk linked to exogenous and endogenous factors. The second part of the research uses the statistical evidence gathered as input to a semi-parametric model for pricing derivatives, based on elements of Information Theory. The model was back-tested over an extensive database of local interest rate options, and compared to the results of a traditional market model (BGM). The thesis concludes that the dynamics of the Brazilian yield curve is in part driven by its historical heritage, and endogenous risk factors including moments of bond returns of third and fourth orders are relevant for the premia structure and evolution. Bringing these elements into a modeling process might partially bridge the gap between classical curve models and the local pricing practice.

Bakgrund: Marknadens riskpremie kan förklaras som den förväntade avkastning en investerare kräver för att acceptera en viss risk. Hur riskpremien skall bestämmas har stått i fokus för omfattande debatter de senaste åren men fortfarande har ingen ultimat lösning infunnit sig. Det finns två huvudsakliga tillvägagångssätt för att uppskatta riskpremien. Det ena att använda historisk data över aktieutvecklingen och därefter förvänta sig att en framtida utveckling kommer att vara likvärdig. Den andra är att göra uppskattningar av den framtida utvecklingen, så som framtida utdelningar, framtida vinster, BNP och inflation och därifrån göra en uppskattning utav riskpremien. Att använda sig av historiska värden har tidigare varit en accepterad metod både i den akademiska och finansiella värden men då den på senare tid har mötts av omfattande kritik, har modeller baserade på uppskattningar av framtiden vuxit sig starkare. Syfte: Syftet med denna uppsats är att ge en djupgående beskrivning av hur svenska finansiella företag uppskattar och hanterar riskpremium för den svenska aktiemarknaden. Därigenom fanns en avsikt att studera vilken metod som främst användes, hur viktigt riskpremium i form av ett investeringsinstrument var, och morgondagens betydelse av riskpremium. Metod: Författarna använde sig av en kvalitativ metod, där det empiriska materialet samlades in med hjälp av personliga intervjuer. Intervjufrågor av öppen karaktär skickades ut till respondenterna i förväg, och intervjuerna ägde därefter rum i Stockholm och Göteborg. I den teoretiska referensramen användes både så kallad primär och sekundär litteratur för att kunna redogöra en övergripande bild av problemområdet. Den primära litteraturen, som framförallt ligger till grund för kapitel tre, sågs extra viktig att inkludera då den möjliggjorde en minskad subjektivitet som annars hade riskerat att belasta uppsatsen. Resultat: Resultaten visade en varierad syn mellan respondenterna där vissa ansåg att riskpremien hade ringa betydelse och andra att det var en mycket viktig variabel. Överlag fanns det dock ett ökat intresse de senaste åren. Även val av metod varierade och vare sig historisk data eller framtida uppskattningar kunde sägas ha ett övertag bland användarna. Avslutningsvis såg författarna ett ökat intresse för de ingående variablerna i modeller som baseras på framtida förväntade värden och kunde därav visa att den framtida debatten sannolikt kommer att behandla vilka variabler som bör inkluderas i denna typ av modeller och hur de bör uppskattas.

Equity risk premium is a financial variable that is surrounded by mystery. Starting from the almost 30 year old equity premium puzzle caused by considerations that equity premium values which are observable in past data imply an implausibly high risk aversion to more recent statements that equity premium does not exist anymore. The purpose of this paper is to find out more about the traits and characteristics of equity risk premium, its current status and interactions of its values across international markets by conducting data analysis on mature equity markets using optimal methods as suggested in academic literature. This paper attempts to clear some of the confusion regarding equity premiums by analyzing equity excess returns in the mature equity markets of France, Germany, Sweden, United Kingdom and USA from 1970 to 2012. It is concluded that equity premium follows a mean reverting process however in short-term and mid-term its values can be volatile and in March 2000 there might have been a structural break. The obtained current equity premium values are significantly higher than zero. At the same time they are lower than popularly used values that are based on longer periods of past data. The paper also finds out that equity premiums in different countries are highly correlated not only due to shared global influence but also due to some direct causality relationships between them, most of which are positive. A panel data analysis is conducted as well to test the explanatory power of some macroeconomic and financial variables on the equity risk premium values and it is concluded that risk-free rate and unemployment rate have some explanatory power for equity risk premium values. This paper manages to clear a part of the mystery that surrounds the equity risk premium.

<p>Bakgrund: Marknadens riskpremie kan förklaras som den förväntade avkastning en investerare kräver för att acceptera en viss risk. Hur riskpremien skall bestämmas har stått i fokus för omfattande debatter de senaste åren men fortfarande har ingen ultimat lösning infunnit sig. Det finns två huvudsakliga tillvägagångssätt för att uppskatta riskpremien. Det ena att använda historisk data över aktieutvecklingen och därefter förvänta sig att en framtida utveckling kommer att vara likvärdig. Den andra är att göra uppskattningar av den framtida utvecklingen, så som framtida utdelningar, framtida vinster, BNP och inflation och därifrån göra en uppskattning utav riskpremien. Att använda sig av historiska värden har tidigare varit en accepterad metod både i den akademiska och finansiella värden men då den på senare tid har mötts av omfattande kritik, har modeller baserade på uppskattningar av framtiden vuxit sig starkare.</p><p>Syfte: Syftet med denna uppsats är att ge en djupgående beskrivning av hur svenska finansiella företag uppskattar och hanterar riskpremium för den svenska aktiemarknaden. Därigenom fanns en avsikt att studera vilken metod som främst användes, hur viktigt riskpremium i form av ett investeringsinstrument var, och morgondagens betydelse av riskpremium.</p><p>Metod: Författarna använde sig av en kvalitativ metod, där det empiriska materialet samlades in med hjälp av personliga intervjuer. Intervjufrågor av öppen karaktär skickades ut till respondenterna i förväg, och intervjuerna ägde därefter rum i Stockholm och Göteborg. I den teoretiska referensramen användes både så kallad primär och sekundär litteratur för att kunna redogöra en övergripande bild av problemområdet. Den primära litteraturen, som framförallt ligger till grund för kapitel tre, sågs extra viktig att inkludera då den möjliggjorde en minskad subjektivitet som annars hade riskerat att belasta uppsatsen.</p><p>Resultat: Resultaten visade en varierad syn mellan respondenterna där vissa ansåg att riskpremien hade ringa betydelse och andra att det var en mycket viktig variabel. Överlag fanns det dock ett ökat intresse de senaste åren. Även val av metod varierade och vare sig historisk data eller framtida uppskattningar kunde sägas ha ett övertag bland användarna. Avslutningsvis såg författarna ett ökat intresse för de ingående variablerna i modeller som baseras på framtida förväntade värden och kunde därav visa att den framtida debatten sannolikt kommer att behandla vilka variabler som bör inkluderas i denna typ av modeller och hur de bör uppskattas.</p>

近年來的研究顯示英美兩國的無風險利率存在著星期效應，但其股市報酬率的星期效應卻逐漸消失、甚至有反轉，因此本研究想探討台灣加權股價指數報酬率與無風險利率，是否存在著星期效應，抑或跟隨英美兩國的腳步，星期效應不再。此外，本研究亦探討風險溢酬的星期效應，試圖從中解開風險溢酬之謎(Equity Risk Premium)。 行政院於1998年至2000年實施「公務人員每月二次週休二日實施計劃」，台灣股票市場因此實施隔週休二日的制度，這特別的休市制度正好提供本研究進行交割效應假說所需的特殊樣本。認售權證正式於2003年7月上市掛牌買賣，因此去年下半年開始發行的認售權證交易量，亦正好提供本研究檢定投機放空假說所需的樣本。 實證結果顯示，大盤指數報酬率與風險溢酬有顯著的星期效應與週末效應，一週之中每日的報酬率並不相等，其中以週五與週六為最高，有顯著為正的報酬。而週一與週二平均報酬率為負但不顯著。而無風險利率有顯著的星期效應，但週末效應卻不顯著，一週之中每日的利率雖不相等但均顯著異於零。 更進一步探究報酬率、風險溢酬之星期效應與週末效應的成因，發現此星期效應、週末效應支持資訊處理假說、正向回饋假說與投機放空假說；但是卻不支持交割效應假說淤測量錯誤假說。因此得知台灣股票市場報酬率與風險溢酬之星期效應與週末效應的成因，乃為投資人在工作日與非工作日資訊處理成本的差異而導致；此外，過多的融券交易量亦為造成星期效應與週末效應的成因之一。 關鍵詞：星期效應、週末效應、風險溢酬、TLS模型、Power Ratio