IDEAS home Printed from https://ideas.repec.org/p/bcb/wpaper/527.html
   My bibliography  Save this paper

Is the Equity Risk Premium Compressed in Brazil?

Author

Listed:
  • Alexandre de Carvalho
  • Thiago Trafane Oliveira Santos

Abstract

The ex-post or historical equity risk premium in Brazil is low compared to other countries. In this paper we seek to evaluate whether this is a result of a compressed ex-ante equity risk premium, using two different approaches. First, we investigate the effects of government-controlled shareholders, which could lower the risk premium if the government is also interested in nonpecuniary benefits. To verify this, we estimate the Brazilian equity risk premium from 2002 to 2017 using cross-section regressions based on the CAPM and the Gordon model, but supposing stocks are priced differently by government and private investors. An important feature of this approach is that we control for the possible impact of the government as firm’s manager on the perceived risk of the firm. Our results suggest the government does not compress the equity risk premium, although the government as a manager seems to influence the firms’ risk. Second, we decompose the Brazilian equity risk premium using a global CAPM estimated with quarterly data from 47 countries and find it is consistent with international risk premia. Therefore, the findings from the two approaches indicate the low ex-post risk premium in Brazil seems to be a consequence of a relatively short time series rather than a Brazilian idiosyncrasy.

Suggested Citation

  • Alexandre de Carvalho & Thiago Trafane Oliveira Santos, 2020. "Is the Equity Risk Premium Compressed in Brazil?," Working Papers Series 527, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:527
    as

    Download full text from publisher

    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps527.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Polk, Christopher & Thompson, Samuel & Vuolteenaho, Tuomo, 2006. "Cross-sectional forecasts of the equity premium," Journal of Financial Economics, Elsevier, vol. 81(1), pages 101-141, July.
    2. Sanvicente, Antonio Zoratto & Carvalho, Mauricio Rocha de, 2016. "Determinants of the implied equity risk premium in Brazil," Textos para discussão 430, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thiago Trafane Oliveira Santos, 2020. "A General Characterization of the Capital Cost and the Natural Interest Rate: an application for Brazil," Working Papers Series 524, Central Bank of Brazil, Research Department.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fernando M. Duarte & Carlo Rosa, 2015. "The equity risk premium: a review of models," Economic Policy Review, Federal Reserve Bank of New York, issue 2, pages 39-57.
    2. Zongwu Cai & Bingyi Jing & Xinbing Kong & Zhi Liu, 2017. "Nonparametric regression with nearly integrated regressors under long‐run dependence," Econometrics Journal, Royal Economic Society, vol. 20(1), pages 118-138, February.
    3. Arianna Agosto & Alessandra Mainini & Enrico Moretto, 2019. "Stochastic dividend discount model: covariance of random stock prices," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(3), pages 552-568, July.
    4. Kelly Nianyun Cai & Xiaoquan Jiang & Hei Wai Lee, 2013. "Debt Ipo Waves, Investor Sentiment, Market Conditions, And Issue Quality," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(4), pages 435-452, December.
    5. Karabiyik, Hande & Westerlund, Joakim & Narayan, Paresh, 2016. "On the estimation and testing of predictive panel regressions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 115-125.
    6. Maio, Paulo & Xu, Danielle, 2020. "Cash-flow or return predictability at long horizons? The case of earnings yield," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 172-192.
    7. Pierre Giot & Mikael Petitjean, 2011. "On the statistical and economic performance of stock return predictive regression models: an international perspective," Quantitative Finance, Taylor & Francis Journals, vol. 11(2), pages 175-193.
    8. Joscha Beckmann & Rainer Schüssler, 2014. "Forecasting Equity Premia using Bayesian Dynamic Model Averaging," CQE Working Papers 2914, Center for Quantitative Economics (CQE), University of Muenster.
    9. Shiyang Huang & Xin Liu & Dong Lou & Christopher Polk, 2024. "The Booms and Busts of Beta Arbitrage," Management Science, INFORMS, vol. 70(8), pages 5367-5385, August.
    10. Robin Greenwood & Samuel Hanson, 2010. "Characteristic Timing," NBER Working Papers 15948, National Bureau of Economic Research, Inc.
    11. repec:wyi:journl:002108 is not listed on IDEAS
    12. Carolin Pflueger & Emil Siriwardane & Adi Sunderam, 2019. "Financial Market Risk Perceptions and the Macroeconomy," NBER Working Papers 26290, National Bureau of Economic Research, Inc.
    13. Malcolm P. Baker & Ryan Taliaferro & Jeffrey Wurgler, 2004. "Pseudo Market Timing and Predictive Regressions," NBER Working Papers 10823, National Bureau of Economic Research, Inc.
    14. Guanais, Luiz Felipe Poli & Sanvicente, Antonio Zoratto & Sheng, Hsia Hua, 2017. "Cost of equity estimation for the Brazilian market: a test of the Goldman Sachs model," Textos para discussão 447, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    15. William Hardin & Xiaoquan Jiang & Zhonghua Wu, 2012. "REIT Stock Prices with Inflation Hedging and Illusion," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 262-287, June.
    16. John Y. Campbell & Christopher Polk & Tuomo Vuolteenaho, 2010. "Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 305-344, January.
    17. Michael Jansson & Marcelo J. Moreira, 2006. "Optimal Inference in Regression Models with Nearly Integrated Regressors," Econometrica, Econometric Society, vol. 74(3), pages 681-714, May.
    18. Efstathios Avdis & Jessica A. Wachter, 2013. "Maximum likelihood estimation of the equity premium," NBER Working Papers 19684, National Bureau of Economic Research, Inc.
    19. Lutzenberger, Fabian T., 2014. "The predictability of aggregate returns on commodity futures," Review of Financial Economics, Elsevier, vol. 23(3), pages 120-130.
    20. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    21. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcb:wpaper:527. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rodrigo Barbone Gonzalez (email available below). General contact details of provider: https://www.bcb.gov.br/en .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.