UZH-Logo

The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate


Nitschka, Thomas (2008). The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate. Working paper series / Institute for Empirical Research in Economics No. 385, University of Zurich.

Abstract

Incomplete consumption risk sharing implies that the market risk premium is high in times of lack of risk sharing and vice versa. In the time period from 1980 to 2007, this implication of incomplete consumption risk sharing for the market price of risk is not mirrored in excess returns on stocks but in returns on real estate both in the Euro Area and in the U.S. This finding thus casts doubt on the common practice to approximate the market return by a stock index return in empirical tests of the Sharpe-Lintner capital asset pricing model. However, cross-sectional asset pricing tests suggest that there are fundamental differences between the Euro Area and the U.S. in this respect. The return on real estate does not add any explanatory power for domestic or foreign asset returns in excess of a stock index return in the U.S. The opposite reasoning applies to the Euro Area. Finally, this paper shows that the distinction between rather global and country-specific pricing factors does not seem to be important for the pricing of excess returns on foreign currencies.

Incomplete consumption risk sharing implies that the market risk premium is high in times of lack of risk sharing and vice versa. In the time period from 1980 to 2007, this implication of incomplete consumption risk sharing for the market price of risk is not mirrored in excess returns on stocks but in returns on real estate both in the Euro Area and in the U.S. This finding thus casts doubt on the common practice to approximate the market return by a stock index return in empirical tests of the Sharpe-Lintner capital asset pricing model. However, cross-sectional asset pricing tests suggest that there are fundamental differences between the Euro Area and the U.S. in this respect. The return on real estate does not add any explanatory power for domestic or foreign asset returns in excess of a stock index return in the U.S. The opposite reasoning applies to the Euro Area. Finally, this paper shows that the distinction between rather global and country-specific pricing factors does not seem to be important for the pricing of excess returns on foreign currencies.

Downloads

650 downloads since deposited on 29 Nov 2011
134 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:August 2008
Deposited On:29 Nov 2011 22:47
Last Modified:05 Apr 2016 15:12
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: http://doi.org/10.5167/uzh-52338

Download

[img]
Preview
Filetype: PDF
Size: 286kB

TrendTerms

TrendTerms displays relevant terms of the abstract of this publication and related documents on a map. The terms and their relations were extracted from ZORA using word statistics. Their timelines are taken from ZORA as well. The bubble size of a term is proportional to the number of documents where the term occurs. Red, orange, yellow and green colors are used for terms that occur in the current document; red indicates high interlinkedness of a term with other terms, orange, yellow and green decreasing interlinkedness. Blue is used for terms that have a relation with the terms in this document, but occur in other documents.
You can navigate and zoom the map. Mouse-hovering a term displays its timeline, clicking it yields the associated documents.

Author Collaborations