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Risk-free Rate (risk-free + rate)
Selected AbstractsFinancial Frictions and Risky Corporate DebtECONOMIC NOTES, Issue 1 2007Doriana Ruffino We offer clarifications on Cooley and Quadrini (2001) regarding financial frictions and risky corporate debt pricing. Even in a frictionless world, the promised rate on corporate debt is not identical across firms and across capital structures and it is not equal to the risk-free rate. Frictions are unnecessary for credit spreads to arise. Only if the macroeconomy is in actuality risk free or risk neutral do interest rates on corporate debt reflect default probabilities. To the extent that the firm's entire financial structure is traded, a bias in credit spreads introduces an exploitable arbitrage opportunity. Re-establishing no-arbitrage, firm dynamics move in the opposite direction to Cooley and Quadrini's. [source] Implications for Asset Pricing Puzzles of a Roll-over Assumption for the Risk-Free Asset,INTERNATIONAL REVIEW OF FINANCE, Issue 3-4 2008GEOFFREY J. WARREN ABSTRACT The equity risk premium and risk-free rate puzzles are largely resolved by combining persistent uncertainty over the long-term consumption growth rate with analysis of the risk-free asset on a ,roll-over' basis. Under these conditions, cash equivalents are evaluated as a multi-period investment strategy that hedges against adverse growth rate outcomes. The premium on the risky asset is raised and the risk-free rate lowered due to their respective relation with multi-period consumption risk. Historical average asset returns are matched at plausible risk aversion. [source] Estimating the Equity Risk Premium Using Accounting FundamentalsJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 9-10 2000John O'Hanlon This study uses recent developments in the theoretical modelling of the links between unrecorded accounting goodwill, accounting profitability and the cost of equity, together with Capital Asset Pricing Model (CAPM) betas, to estimate the ex-ante equity risk premium in the UK. The results suggest that, over our sample period from 1968 to 1995, the premium has been in the region of 5%. Our estimate lends support to the view that the ex-ante equity risk premium is substantially less than the historical average of the excess of equity returns over the risk-free rate, and is similar to the rates applied recently by UK competition regulators. [source] Performance of Australia's Ethical FundsTHE AUSTRALIAN ECONOMIC REVIEW, Issue 2 2001John Tippet Australia's three major public ethical investment funds achieved mixed financial success in the seven years to 30 June 1998, though on average the funds underperformed relative to the market. For the four-year and five-year holding periods to 30 June 1995 and 1996 respectively, the average holding-period returns for the three funds were less than the risk-free rate. This is strong evidence of investors incurring a financial discount for investing ethically and, with respect to the ethical investor's utility function, it is evidence of the marginal utility increasing as the ethical attributes of assets increase. [source] Inspecting The Mechanism: Closed-Form Solutions For Asset Prices In Real Business Cycle Models*THE ECONOMIC JOURNAL, Issue 489 2003Martin Lettau We derive closed-form solutions for asset prices in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but also why the premium of equity over a real long-term bond is small and often negative. In particular, risk premia for equity and long real bonds are negative when technology shocks are permanent. [source] Risks for the Long Run: A Potential Resolution of Asset Pricing PuzzlesTHE JOURNAL OF FINANCE, Issue 4 2004Ravi Bansal ABSTRACT We model consumption and dividend growth rates as containing (1) a small long-run predictable component, and (2) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin's (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long-run growth prospects raise equity prices. The model can justify the equity premium, the risk-free rate, and the volatility of the market return, risk-free rate, and the price,dividend ratio. As in the data, dividend yields predict returns and the volatility of returns is time-varying. [source] A two-mean reverting-factor model of the term structure of interest ratesTHE JOURNAL OF FUTURES MARKETS, Issue 11 2003Manuel Moreno This article presents a two-factor model of the term structure of interest rates. It is assumed that default-free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate, and the spread (i.e., the difference) between the short-term (instantaneous) risk-free rate of interest and the long-term rate. Assuming that both factors follow a joint Ornstein-Uhlenbeck process, a general bond pricing equation is derived. Closed-form expressions for prices of bonds and interest rate derivatives are obtained. The analytical formula for derivatives is applied to price European options on discount bonds and more complex types of options. Finally, empirical evidence of the model's performance in comparison with an alternative two-factor (Vasicek-CIR) model is presented. The findings show that both models exhibit a similar behavior for the shortest maturities. However, importantly, the results demonstrate that modeling the volatility in the long-term rate process can help to fit the observed data, and can improve the prediction of the future movements in medium- and long-term interest rates. So it is not so clear which is the best model to be used. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23: 1075,1105, 2003 [source] Approximation for convenience yield in commodity futures pricingTHE JOURNAL OF FUTURES MARKETS, Issue 10 2002Richard HeaneyArticle first published online: 13 AUG 200 The pricing of commodity futures contracts is important both for professionals and academics. It is often argued that futures prices include a convenience yield, and this article uses a simple trading strategy to approximate the impact of convenience yields. The approximation requires only three variables,underlying asset price volatility, futures contract price volatility, and the futures contract time to maturity. The approximation is tested using spot and futures prices from the London Metals Exchange contracts for copper, lead, and zinc with quarterly observations drawn from a 25-year period from 1975 to 2000. Matching Euro-Market interest rates are used to estimate the risk-free rate. The convenience yield approximation is both statistically and economically important in explaining variation between the futures price and the spot price after adjustment for interest rates. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1005,1017, 2002 [source] Ruin theory for classical risk process that is perturbed by diffusion with risky investmentsAPPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY, Issue 1 2009Xiang Lin Abstract In this paper, we study the ruin theory for classical risk process that is perturbed by diffusion with risky investments. We obtain the upper bound for the minimal ruin probability. We also investigate the relationships between the adjustment coefficient and the diffusion volatility parameter, the risk-free rate and the correlation coefficient by numerical calculation. We give the relationships between ruin and investment. Copyright © 2008 John Wiley & Sons, Ltd. [source] | ||||||||||||||||||||||