This article contributes to the financial literature by investigating the formation of the international stock risk premium in emerging market zones. Our results from the estimation of a dynamic augmented capital asset pricing model show that the currency risk premium is the most important...

Valuing a firm using the discounted cash flow method (DCF) requires the joint determination of the market value of its equity (MVE) together with the equity risk premium (ERP) the firm should earn, since the latter is part of the discount rate used in the calculation of the MVE. This paper...

Hedging involves tradeoffs in incomplete markets because the number of hedging instruments is limited. Even when an extensive set of hedging instruments is available, the ease with which these instruments can be traded may be highly variable. This study finds systematic variations in liquidity...

Applying mathematical models to assess the cost of capital is frequently used for investments in marketable assets in the stock market. Using these models to substantiate investments management decisions has to provide accurate estimations of future yields or otherwise, to eliminate the...

Generally, in the standard presentation of the expected utility model, the risk premium represents how much a risk-averse decision maker is ready to pay to have a risk eliminated. Here, however, we introduce a different risk premium: how much should a risk (which could be the return on a...

Time-varying risk premiums and CAPM betas for several assets traded on the Prague Stock Exchange are estimated within a model which is derived as a restriction of a general stochastic discount factor model. The restriction takes the form of the Sharpe-Lintner capital asset pricing model. A...

Using Consensus Economics survey data on experts’ expectations, we aim to model the 3- and 12-month ahead ex-ante risk premia on the JPY/USD and the GBP/USD exchange markets. For each market and at a given horizon, we show that the risk premium is well determined by the conditional expected...

While the risk return trade-off theory suggests a positive relationship between the expected return and the conditional volatility, the volatility feedback theory implies a channel that allows the conditional volatility to negatively affect the expected return. We examine the effects of the risk...

In the study we introduce an extension to a stochastic volatility in mean model (SV-M), allowing for discrete regime switches in the risk premium parameter. The logic behind the idea is that neglecting a possibly regimechanging nature of the relation between the current volatility (conditional...

The study aims at a statistical verification of breaks in the risk-return relationship for shares of individual companies quoted at the Warsaw Stock Exchange. To this end a stochastic volatility model incorporating Markov switching in-mean effect (SV-MS-M) is employed. We argue that neglecting...