Quantitative Research and Analytics Three Dogs That Did Not Bark: Risk Premia and Stock Market Shocks
Executive Summary Thereʼs a bone of contention among investors: Are U.S. equity values about right or far too high? Based on the equity risk premium, stocks are either marginally expensive or fairly valued (depending on the data window). Yet standard valuation ratios – such as market capitalization-to-GDP, Tobin’s Q, CAPE and market cap-to-corporate profits – suggest stock prices are severely inflated. Equity values are vulnerable to three types of risk premia: the conventional equity risk premium, the risk of monetary tightening and the prospect of decreasing inequality. Download PDF
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