I must sing the praises of David Blitz and the quant team at Robeco once again. I know it is getting boring but is it my fault that these guys keep on writing interesting and relevant research? This time, David asks if the equity risk premium is the same, and whether risk-free returns are high or low
Dear Joachim, Equity risk premium sould be higher in the médium and long term, not in the specific year when the risk materialises as an actual recessiion or market crash
Should they be looking at equity risk premium based on different levels of real rates as opposed to nominal rates, since equities are (to a first order approximation) real assets?
Another simplifying way of looking at this is a higher risk free rate induces uncertainty very certainly like an Earnings drop. So if the P/E for the entire market or an individual stock is 50 when the risk free rate is low, the E will decline when the 10 yr bond yield moves up , P/E now becomes 75 or 100x assuming E declines by 25%, 50% brought on by the deflationary effect of the higher risk free rate
Dear Joachim, Equity risk premium sould be higher in the médium and long term, not in the specific year when the risk materialises as an actual recessiion or market crash
Regards
Esteban
Should they be looking at equity risk premium based on different levels of real rates as opposed to nominal rates, since equities are (to a first order approximation) real assets?
Very interesting Joachim. For teh benefit of us, do you have a position for Emerging Markets? We could use this analysis as a benchmark? Any insight?
Hi mr.klement
Another simplifying way of looking at this is a higher risk free rate induces uncertainty very certainly like an Earnings drop. So if the P/E for the entire market or an individual stock is 50 when the risk free rate is low, the E will decline when the 10 yr bond yield moves up , P/E now becomes 75 or 100x assuming E declines by 25%, 50% brought on by the deflationary effect of the higher risk free rate