Risk premia estimation in Brazil: wait until 2041
The estimation results in the literature on Brazilian risk premia are not robust. For instance, among the 133 market risk premium estimates reported in the literature, 41 are positive, 18 are negative, and the remainder are not significant. In this study, we investigate the grounds for this lack of consensus. First, we analyze the sensitivity of the US risk premia estimation to two relevant constraints present in the Brazilian market: the small number of assets (137 eligible stocks) and the short time-series sample available for estimation (14 years). We conclude that the second constraint, small T, has greater impact on the results. Then, we evaluate the two potential causes of problems in risk premia estimations with small T: i) small sample bias on betas, and ii) divergence between ex-post and ex-ante risk premia. Through Monte Carlo simulations, we conclude that for the T available for Brazil, the beta estimates are no longer a problem. However, it is necessary to wait until 2041 to be able to estimate ex-ante risk premia with Brazilian data.
|Date of creation:||12 Dec 2016|
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