Handbook of the Equity Risk Premium

CHAPTER 5 Long-Run Risks and Risk Compensation in Equity Markets

Ravi Bansal^*

Fuqua School of Business, Duke University, and NBER

1. Introduction

2. Long-Run Risks Model

2.1. Preferences and the Environment

2.2. Long-Run Growth Rate Risks

2.3. Long-Run Growth and Uncertainty Risks

2.4. Data and Model Implications

3. Cross-Sectional Implications

3.1. Value, Momentum, Size, and the Cross-Sectional Puzzle

4. Conclusion

References

Abstract What drives the compensation in equity markets? This article shows that long-run growth and economic uncertainty in the economy play an important role in determining the risk in equity markets. The size of the market risk premium, the level of the risk-free rate, the volatility of asset prices, and differences ...