Working Paper: NBER ID: w8678
Authors: John R. Graham; Campbell R. Harvey
Abstract: We present new evidence on the distribution of the ex ante risk premium based on a multi-year survey of Chief Financial Officers (CFOs) of U.S. corporations. Currently, we have responses from surveys conducted from the second quarter of 2000 through the third quarter of 2001. The results in this paper will be augmented as future surveys become available. We find direct evidence that the one-year risk premium is highly variable through time and 10-year expected risk premium is stable. In particular, after periods of negative returns, CFOs significantly reduce their one-year market forecasts, disagreement (volatility) increases and returns distributions are more skewed to the left. We also examine the relation between ex ante returns and ex ante volatility. The relation between the one-year expected risk premium and expected risk is negative. However, our research points to the importance of horizon. We find a significantly positive relation between expected return and expected risk at the 10-year horizon.
Keywords: No keywords provided
JEL Codes: G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Recent market performance (G14) | One-year market forecasts (G17) |
| Negative returns (G12) | One-year market forecasts (G17) |
| Expected risk (D81) | One-year expected risk premium (G12) |
| Expected return (G17) | Expected risk at ten-year horizon (G17) |
| Recent performance of the S&P 500 (G17) | Short-term expected risk premium (G17) |
| One-year expected returns (G17) | One-year expected volatility (G17) |
| Ten-year expected returns (G17) | Ten-year expected volatility (G17) |