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Liquidity risk premium in costing of equity capital

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  • Editorial Board Member,

Abstract

Return-on-equity (R-o-E) is a broadly adopted financial performance measure used to comparatively assess financial returns on equity deployed, providing a consistent revenue measure across different risk enterprises. This paper reviews some of the assumptions inherent in modern financial theory which underlie the use of R-o-E metrics. One key to such an hypothesis is an assumed ergodic behaviour of the risk enterprise. A failure of ergodic behaviour to hold leads to a required adjustment to the R-o-E metric in order to circumvent pro-cyclical risk consequences.

Suggested Citation

  • Editorial Board Member,, 2010. "Liquidity risk premium in costing of equity capital," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 4(1), pages 8-11, December.
    • Handle: RePEc:aza:rmfi00:y:2010:v:4:i:1:p:8-11
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    More about this item

    Keywords

    ergodic; risk; uncertainty; return-on-equity;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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