Information Environment and Equity Risk Premium Volatility Around the World
Management Science, Forthcoming
40 Pages Posted: 17 Dec 2011 Last revised: 10 Oct 2014
Date Written: October 14, 2011
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: Suggested Citation