The Equity Premium and Low Interest Rates - Professor Jagjit Chadha

TL;DR

Investors demand a higher return for holding equities due to the uncertainty and risk associated with these volatile assets.

Transcript

well I I'm delighted to be giving a lecture during the daylight hours you may or may not know that Gresham lecturers are or professors are Mo mostly tied up in a crypt at night and only let out once the sun has gone down uh and hence previous to today I've only been allowed out to give my lectures at 7:00 or Beyond um and uh and I think it's mostly... Read More

Key Insights

• ⌛ The equity premium is not a stable phenomenon and can vary over time.
• ✋ Equities offer higher returns on average compared to bonds, but with higher risk and volatility.
• 🧑‍🏭 Different factors such as risk aversion, consumption growth correlation, and policy interventions can influence the equity premium.
• ✳️ Bonds provide more certainty and a lower risk profile compared to equities, making them more attractive to risk-averse investors.

Questions & Answers

Q: Why do investors demand an excess return for holding equities?

Investors are scared of the volatility and uncertainty associated with equities, so they require a higher return as compensation for bearing the risk.

Q: How does the risk of equities compare to the risk of bonds?

Equities have a higher standard deviation of returns compared to bonds, making them more volatile and unpredictable.

Q: How do the returns of equities and bonds differ over time?

Over the long run, equities tend to have higher average returns compared to bonds, but there are periods where bonds outperform equities.

Q: What factors may contribute to the equity premium puzzle?

Various factors including the stability of equity returns, the inclusion of bankrupt or disappearing firms in calculations, heterogeneous households' investment behavior, and the operation of monetary and financial policies can all impact the equity premium.

Summary & Key Takeaways

• Investors seek an excess return for holding equities due to the fear and uncertainty associated with these risky assets.

• Historical data analysis shows that equities have the potential for higher returns compared to bonds over the long run.

• The excess return of equities may be a compensation for bearing the risk associated with these assets.