Comments on: No Risk Premium?

By: Risk and no return Abnormal Returns

Risk and no return Abnormal Returns — Fri, 07 Aug 2009 13:59:27 +0000

[...] question is to what degree this hypothesis will gain adherents. Robin Hanson at Overcoming Bias largely agrees with the Falkenstein’s notions, but believes that this hypothesis is likely to [...]

By: CJS

CJS — Thu, 06 Aug 2009 05:12:23 +0000

I think he’s on to something, though I don’t know if it holds consistently across the spectrum. In the extreme case, this is why people buy lottery tickets.

As for professional investors (hedge funds, mutual funds, etc.), I think they have different incentives. If they can hit a home run and differentiate themselves, they’re set; and if not, they’re not losing their own money.

By: kebko

kebko — Wed, 05 Aug 2009 17:22:28 +0000

Returns on quantifiable risk are going to be arbitraged away. I can understand that. But, investing in equities is an art & a science. Where risks aren’t easily quantified, the risk premium is large, but it’s really more of a skill premium.
I don’t understand the tendency of economists to treat the financial markets as a special case. In every other field, we understand that markets, in perfect form, would eat away profits, but that inertia, location, unquantifiable competencies, etc. can allow some players & organizations to achieve higher than normal returns, and some fail due to poor competence, bad luck, etc.. It’s the same in finance. There are places where a risk premium is available, but it takes skill to capture it.

By: VennData

VennData — Wed, 05 Aug 2009 02:04:07 +0000

With a 30%-plus rise in equities since the Bloomberg article in March ’09, hasn’t nearly one percent been added back to the ERP?

What we saw then was a fluctuation, and now have a 1% EPR.

By: Jess RIedel

Jess RIedel — Mon, 03 Aug 2009 15:20:59 +0000

You can only diversify to eliminate variance which isn’t correlated across the market.

By: Nancy Lebovitz

Nancy Lebovitz — Mon, 03 Aug 2009 14:56:14 +0000

So, you should be able to make an above average return by offering risky investments to investors who are looking for drama– it would be rather like running a casino– until all the slots for offering risky investments are filled, at which point you get an average return.

By: Tim Tyler

Tim Tyler — Mon, 03 Aug 2009 06:54:34 +0000

*If* you could get better than average returns by taking risky investments, those providing secure investments would simply support their service behind the scenes by taking a spread of many risky investments.

So: in a marketplace that is working properly, the *average* return on risky investments can be expected to be the same as on more secure ones. That is the real reason why “there has been no global equity premium over the 30-year period 1979–2009, as observed by Bloomberg” – http://en.wikipedia.org/wiki/Equity_premium_puzzle

By: Kevin Dick

Kevin Dick — Mon, 03 Aug 2009 06:23:05 +0000

What about institutional investors, like pension funds, where the individuals making the investment decisions do not necessarily accrue the wealth corresponding to the decisions (at least not enough of the wealth to dramatically alter their relative wealth)?

By: CannibalSmith

CannibalSmith — Mon, 03 Aug 2009 06:18:51 +0000

But they are probably not difficult enough to make academics eager to affiliate with him

So why doesn’t he make another more difficult analysis for affiliation purposes?

By: James K

James K — Mon, 03 Aug 2009 05:25:13 +0000

I wonder how much of risk aversion is actually loss aversion, in other words preference of the third moment of the returns distribution instead of the second. In fact, people might well be risk loving after adjusting for loss aversion. If nothing else, it would explain people who buy insurance and lottery tickets.