Market-consistent equity risk premiums
The capital asset pricing model used to determine excess return for a given risk level and allocate assets typically uses historical data, which can be a poor predictor of risk. Here, Adrian Alscher and Angus Graham show that by adapting the model to be consistent with market-implied distributions, the market price of risk can be calculated in a forward-looking way
Recent times have been tumultuous for financial institutions. The large losses and associated capital-raising have led to dramatic share price volatility, posing a significant challenge to any model that attempts to determine expected return using historic price information.
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Market-consistent equity risk premiums
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