IDEAS home Printed from https://ideas.repec.org/p/hhs/nhhfms/2011_004.html
   My bibliography  Save this paper

The long term equilibrium interest rate and risk premiums under uncertainty

Author

Listed:
  • Aase, Knut K.

    () (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

Both the equilibrium interest rate and the equity premium, as well as risk premiums of risky investments are all important quantities in cost-benefit analyses. In the light of the current (2008 -) financial crisis, it is of interest to study models that connect the the financial sector with the real economy. The effects of climate change has, on the other hand, been the subject of extensive discussions, for example in connection with the Stern report. The paper addresses both these issues, first based on standard assumptions. In particular we investigate what is needed to have long-term interests lower than short term rates. Our model allows us to tell what happens to risk premiums in turbulent times, consistent with observations. Next we extend the pure exchange model to a production economy. As a result we obtain an equilibrium term structure of interest rates, as well as a model for the equity premium. We end by a discussion of risk adjustments of the discount factor. For projects aimed at insuring future consumption, the interest rate is smaller than the risk free rate. Mitigation can have the characteristics of such a project.

Suggested Citation

  • Aase, Knut K., 2011. "The long term equilibrium interest rate and risk premiums under uncertainty," Discussion Papers 2011/4, Norwegian School of Economics, Department of Business and Management Science.
  • Handle: RePEc:hhs:nhhfms:2011_004
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/11250/164020
    Download Restriction: no

    Citations

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


    Cited by:

    1. Rob Aalbers, 2013. "Optimal Discount Rates for Investments in Mitigation and Adaptation," CPB Discussion Paper 257, CPB Netherlands Bureau for Economic Policy Analysis.

    More about this item

    Keywords

    Dynamic equilibrium; the Lucas model; term structure; CIR; pure exchange; production economy; equity premium puzzle; risk free rate puzzle; climate models; Stern Review;

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • G00 - Financial Economics - - General - - - General

    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:hhs:nhhfms:2011_004. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stein Fossen). General contact details of provider: http://edirc.repec.org/data/dfnhhno.html .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.