What Drives Corporate Asset prices: Short-or Long-Run Risk ?

What Drives Corporate Asset prices: Short-or Long-Run Risk?


Finance Seminar by Biley-Adelphe Ekponon (HEC Montréal, HEC Liège) - N1 - 1701
April 2018, Wednesday 25 ( 3:00 pm)




This paper investigates the relative impact of various types of systematic risk on corporate asset prices. Equity risk premium and credit spreads are priced in a consumption-based corporate finance model with time-varying macroeconomic conditions. We decompose the risk premia into different sources of systematic risk compensation and show that long-run risk commands most of the risk premium (about 70%), for both equities and bonds. The role of long-run risk in the equity risk premium is amplified in recessions but remains stable over the business cycle for credit spreads. The relative importance of short- vs. long-run risk also varies at the cross-section. An empirical analysis over the period 1952-2016 provides support for the main predictions of the model.