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Understanding Risk Premium: A Conceptual and Practical Exploration in Modern Financial Markets

In: Proceedings of the 2025 4th International Conference on Public Service, Economic Management and Sustainable Development (PESD 2025)

Author

Listed:
  • Xinyi Zhou

    (Lehigh University, MS in Management)

Abstract

The risk premium is a significant aspect of contemporary finance, accounting for the additional return that investors require to undertake extra risk. While the role of the risk premium is fundamental to asset pricing theory and portfolio theory, its nature, determinants, and time-varying behavior remain points of controversy in academia and practice. The core theoretical frameworks, including utility theory and the Capital Asset Pricing Model (CAPM), are discussed and the various types of risk premium, including the equity premium, the credit premium, and the liquidity premium, are classified. The macroeconomic indicators, investor sentiment, and the behavior of the volatility of the risk premium are then examined. Historical records and case studies based on the conditions of the financial crisis are used to verify the results. The findings show that the risk premiums are not static but react to changes in the behavior and structure of the market.

Suggested Citation

  • Xinyi Zhou, 2025. "Understanding Risk Premium: A Conceptual and Practical Exploration in Modern Financial Markets," Advances in Economics, Business and Management Research, in: Qihui Chen & Nazrul Islam & Zulkiflee bin Mohamed & Yahua Xu (ed.), Proceedings of the 2025 4th International Conference on Public Service, Economic Management and Sustainable Development (PESD 2025), pages 148-156, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-916-2_18
    DOI: 10.2991/978-94-6463-916-2_18
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