Events

Professor Stavros Panageas
Professor of Finance
Anderson School Management
University of California, Los Angeles

Macro-finance models featuring an infinitely-lived, representative agent typically imply that (a) the equity premium reflects compensation for aggregate risk and (b)the long-run, risk-adjusted growth rate of consumption is smaller than the risk-free rate (“transversality condition”). The international historical experience with growthindexed bonds suggests that these bonds, which isolate the risk premium of aggregate fluctuations, command only a moderate risk premium. Equity investments that are hedged against aggregate fluctuations still command a sizable equity premium, suggesting that the equity premium is not just compensation for aggregate risk. In addition, the risk-adjusted GDP-growth rate is roughly the same (and slightly higher) than the risk-free rate, which calls into question one of the basic tenets of standard macro-finance models. The findings have potential implications for some recent puzzles pertaining to the pricing of government debt.