Information Environment and Equity Risk Premium Volatility Around the World

Management Science, Forthcoming

40 Pages Posted: 17 Dec 2011 Last revised: 10 Oct 2014

See all articles by Sie Ting Lau

Sie Ting Lau

Nanyang Technological University (NTU) - Division of Banking & Finance

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: October 14, 2011

Abstract

This paper examines whether and how differences in investors' information environment are related to cross-country differences in the market risk premium volatility. We use the vector-autoregressive and implied cost of capital methods to extract time variation in risk premiums for 41 developed and emerging markets worldwide. Consistent with theoretical predictions, countries with better information environments tend to experience a lower risk premium volatility, even after controlling for various country variables that are potentially associated with variation in risk premiums. Our analysis of two exogenous events, specifically the 1997 Asian financial crisis and 2008 global financial crisis, further corroborates our key finding that the information environment plays an important role in explaining the market risk premium volatility.

Keywords: market risk premium volatility, information environment, implied cost of capital, VAR

JEL Classification: G12, G14, G18

Suggested Citation

Lau, Sie Ting and Ng, Lilian and Zhang, Bohui, Information Environment and Equity Risk Premium Volatility Around the World (October 14, 2011). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1972507 or http://dx.doi.org/10.2139/ssrn.1972507

Sie Ting Lau

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore
65 790 6051 (Phone)
65 791 3697 (Fax)

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Bohui Zhang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

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