Information environment and equity risk premium volatility around the world

Sie Ting Lau, Lilian Ng, Bohui Zhang

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines whether and how differences in investors' information environments (measured by a country's information disclosure, accounting standards, and financial transparency) are related to cross-country differences in the market risk premium volatility. We use the vector-autoregressive and implied cost of capital methods to extract time variation in risk premiums for 41 developed and emerging markets worldwide. Consistent with theoretical predictions, countries with better information environments tend to experience a lower risk premium volatility, even after controlling for various country variables that are potentially associated with variation in risk premiums. Our analysis of two exogenous events, specifically the 1997 Asian financial crisis and 2008 global financial crisis, further corroborates our key finding that information environments play an important role in explaining market risk premium variability.
Original languageEnglish
Pages (from-to)1322-1340
Number of pages19
JournalManagement Science
Volume58
Issue number7
DOIs
Publication statusPublished - Jul 2012
Externally publishedYes

Keywords

  • market risk premium volatility
  • information environments
  • implied cost of capital
  • VAR

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