Data Management

A New ?Risky? World Order: Unstable Risk Premiums Implications For Practice

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Executive Summary

Investors have to be offered risk premiums to invest in risky assets. These risk premiums take different forms in different asset markets: Equity Risk Premiums (ERP) in stock markets, default spreads in bond markets and real asset premiums in other asset markets. These premiums have their roots in fundamentals and will vary as a function of uncertainty about the economy, the risk aversion of investors, information uncertainty and fear of catastrophe, among other factors. In practice, analysts in developed markets have generally looked backwards to estimate risk premiums, using historical data to arrive at their estimates.

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