Alternative Methods for Determining the Expected Market Risk Premium: Theory and Evidence

Based upon the assumption that there exist uncertain inflation and three types of assets--an inflation hedge portfolio, equity assets, and nominal bonds, the theoretical section of the study derives market equilibrium risk premiums among the three types of assets. Two hypotheses are proposed from the two market equilibrium conditions specified in the model. Empirical tests of the two hypotheses demonstrate a statistically significant risk premium between the expected real return on nominal bonds and the expected real return on the inflation hedge portfolio. The tests provide evidence that investors do consider the effect of uncertain inflation on assets' returns when they allocate their initial wealth to different types of assets. Furthermore, the study demonstrates that the asset pricing model under uncertain inflation can be derived from both the mean-variance utility maximization approach and the Arbitrage Pricing Theory approach.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Finance

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Chu, Chen-Chin

• Economics, Finance

Identifier

(UMI)AAI8422040

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/71513