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Matching the BRIC equity premium: A structural approach

Emerging Markets Review, Vol. 22, pp. 66-75

Authors:
Giuliano Curatola,
Michael Donadelli,
Patrick Grüning
Research Area:
Financial Markets
Date:
Mar 2015
Keywords:
BRIC countries, Equity risk premium, Long-run risk, Persistence
Abstract:

The equity risk premium (ERP) in BRIC markets is, on average, significantly higher than that in the US market. This paper employs an endowment economy with recursive preferences and long-run risk to explain the ERP generated by a portfolio of BRIC equity indices. The combination of recursive preferences and long-run risk partially explains the BRIC ERP. It turns out that there is a puzzle with respect to BRIC data as well. This holds even if we account for high levels of aversion to consumption and utility risk and for the empirically observed autoregressive structure of US consumption and BRIC dividend growth.

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