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The relation between the equity risk premium and the bond maturity premium in the UK: 1900-2006

Kanas, Angelos (2009) The relation between the equity risk premium and the bond maturity premium in the UK: 1900-2006. Journal of Economics and Finance, 33 (2). pp. 111-127. ISSN 1055-0925. (doi:10.1007/s12197-008-9038-2) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
Official URL
http://dx.doi.org/10.1007/s12197-008-9038-2

Abstract

Using a rich data set for the UK for over a century, we find that the relation between the equity risk premium and the government bond maturity premium is nonlinear and subject to stochastic regime switching. We identify a regime in which both premia are jointly characterized by low volatility and another regime in which both premia are characterized by high volatility. The occurrence of the high volatility regime chronologically coincides with major changes in the pound exchange rate. The low volatility regime has a higher probability of turning up over two consecutive years than the high volatility regime, but it is not perceived by investors to be an absorbing regime. The lagged maturity premium is a strong predictor of the equity risk premium only in the regime of low volatility. In addition, the lagged equity premium is a predictor of the maturity premium also in the low volatility regime. This result on regime-dependent bidirectional predictability is robust to alternative definitions of the equity premium, and to the inclusion of real interest rate and real growth effects. © 2008 Springer Science+Business Media, LLC.

Item Type: Article
DOI/Identification number: 10.1007/s12197-008-9038-2
Additional information: Unmapped bibliographic data: AD - Department of Economics, University of Crete, 74100 Rethymnon, Crete, Greece [Field not mapped to EPrints] AD - IACM-FORTH, P.O. Box 1385, 71110 Heraklion, Crete, Greece [Field not mapped to EPrints] JA - J. Econ. Financ. [Field not mapped to EPrints]
Uncontrolled keywords: Equity Risk Premium, Government Bond Maturity Premium, Nonlinearity, Predictability, Stochastic Regimes
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Tracey Pemble
Date Deposited: 22 May 2014 13:44 UTC
Last Modified: 29 May 2019 12:36 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/41144 (The current URI for this page, for reference purposes)
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