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Factors Driving Risk Premia


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  • Torsten Sløk
  • Mike Kennedy


This paper assesses the extent to which the fall in risk premia of a number of financial assets, which occurred throughout 2003, was due to improvements in factors specific to individual markets at that time or to general economic fundamentals coupled with OECD-wide abundant liquidity. Regarding the latter two factors, principal component analysis was used here to identify a common trend in risk premia in equity, corporate bond and emerging markets since early 1998. The analysis finds that both economic fundamentals and liquidity have played a statistically significant role in driving the common factor. It also finds that liquidity (measured as the GDP weighted average of M3 of the three major economies less its trend) performs better than similarly weighted short-term interest rates. By spring 2004, the common factor in different risk premia had fallen below what could be explained by economic fundamentals and liquidity ... Les déterminants des primes de risque Ce document examine dans quelle mesure la chute des primes de risque de certains placements financiers au cours de 2003 peut être attribuée à l’amélioration de facteurs spécifiques à certains marchés durant cette période, ou aux fondamentaux associés à l’abondante liquidité dans les pays de l’OCDE. En ce qui concerne ces deux derniers facteurs, une analyse en composantes principales est appliquée afin d’identifier une tendance commune aux primes de risque dans les marchés boursiers, obligataires et les marches émergents depuis le début de 1998. Cette analyse montre qu’aussi bien les fondamentaux que la liquidité ont joué un rôle statistiquement significatif concernant le facteur commun. De plus, la liquidité (évaluée comme la moyenne du M3 dans les trois principales économies pondérée par le PIB, moins la tendance) s’avère comporter un meilleur pouvoir explicatif que les taux d’intérêts à court terme (pondérés de manière similaire). Au printemps 2004, le facteur commun aux ...

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 385.

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Date of creation: 29 Apr 2004
Date of revision:
Handle: RePEc:oec:ecoaaa:385-en

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Keywords: risk premia; factor analysis; principal components; liquidity; fundamentals; analyse factorielle; fondamentaux; primes de risque; analyse en composantes principales; liquidité;

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Cited by:
  1. Laura E. Kodres & Kristian Hartelius & Kenichiro Kashiwase, 2008. "Emerging Market Spread Compression," IMF Working Papers, International Monetary Fund 08/10, International Monetary Fund.
  2. Virginie Coudert & Mathieu Gex, 2007. "Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of Empirical Indicators," Working Papers 2007-02, CEPII research center.
  3. Audzeyeva, Alena & Schenk-Hoppé, Klaus Reiner, 2010. "The role of country, regional and global market risks in the dynamics of Latin American yield spreads," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 20(4), pages 404-422, October.
  4. Laura Jaramillo & Anke Weber, 2012. "Bond Yields in Emerging Economies," IMF Working Papers, International Monetary Fund 12/198, International Monetary Fund.
  5. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, Elsevier, vol. 17(C), pages 169-185.
  6. Papadamou, Stephanos & Siriopoulos, Costas, 2008. "Does the ECB Care about Shifts in Investors’ Risk Appetite?," MPRA Paper 25973, University Library of Munich, Germany.
  7. Coudert, V. & Gex, M., 2006. "Can risk aversion indicators anticipate financial crises?," Financial Stability Review, Banque de France, Banque de France, issue 9, pages 67-87, December.
  8. Philipp Maier & Garima Vasishtha, 2008. "Good Policies or Good Fortune: What Drives the Compression in Emerging Market Spreads?," Working Papers, Bank of Canada 08-25, Bank of Canada.
  9. International Monetary Fund, 2011. "Sovereign Credit Ratings and Spreads in Emerging Markets," IMF Working Papers, International Monetary Fund 11/44, International Monetary Fund.


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