There would, on the other hand, be a useful fall in interest rates, because investors would no longer demand a premium for the risk that the exchange-rate peg would be broken.
According to a 2002 study by two economists at Indiana University, enforcing insider-trading laws reduced the cost of equity in the countries they looked at because investors did not demand a premium for the risk of trading with a crooked counterparty.
While there is still a risk premium paid for emerging market bonds, that risk premium is shrinking as these economies grow and become better managed.
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Essentially, investors have demanded a six-percentage point premium for taking the risk of investing in equities.
If the cash-market yield is also rising, it demonstrates that the market is placing a higher premium for that particular risk.
Its level reflects all sorts of things, including demand from investors for bonds, expectations of future inflation and a risk premium for holding longer-term assets.
Long bonds usually have higher coupons than short ones, as investors demand a premium for exposure to the risk of interest-rate rises and inflation.
The first is that governments running large and potentially unsustainable budget deficits have to pay a risk premium for borrowing in the capital markets.
Long-term nominal interest rates are influenced by many things, including investors' expectations of inflation and future short-term rates, and a risk premium for holding long-term assets.
But here's the thing: the risk premium for lending to the slightly shambolic household of Peston, as opposed to the sovereign nation of Italy, is rather less than I expected.
That would reduce demand for mortgage paper, in addition to embedding a risk premium in the rate for those investors still willing to take the gamble.
There's evidence that the risk premium is peaking for investment grade corporate debt.
If I'm right that the risk premium is peaking for properties that are in no way marginal, the unlocking of credit markets turns back the spread clock.
Some may argue that the risk premium these banks are charging is too high, even accounting for the risk, but what are the chances they will suddenly see the light after this regulation is passed, and drop rates across the board?
And by reducing the currency-risk premium that investors demand for holding kiwi dollars, it would lower real interest rates.
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Suppose that investors have at last heeded the economists' advice, and are now willing to invest in equities for a more reasonable risk premium of, say, three percentage points (recent studies suggest a current figure of one to four percentage points).
The equity risk premium is usually viewed as the extra return that investors demand for holding equities rather than risk-free bonds.
Mr. BRIAN MONTGOMERY (Federal Housing Commissioner, U.S. Department of Housing and Urban Development): And that's the main difference between FHA and the subprime, is we price for the risk with an insurance premium, whereas in most of the subprime world, they price the risk in the interest rate.
Their dividends are variable, their cash flows less certain and therefore an equity risk premium should exist which compensates stockholders for their junior position in the capital structure.
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Given the history of the risk premium, what will the future reward for equity investors be?
They do so by figuring out for all their candidates an "equity risk premium"--the amount of return (appreciation plus dividends) they want over safe ten-year Treasury bonds, based on their best guess.
"For some reason investors put a much higher risk premium on stocks like Bimantara and Citra Marga, " he says.
This difference in valuations is called the equity risk premium, and the more pessimistic the growth prospects for the future, all other things being equal, the higher that premium should be.
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Clawing back Sir Fred's millions would mean that every controversial contract had a political risk premium built into the price a poor deal for the economy.
That's called a risk-based premium structure, and it'll be something new for FHA. And homeowners who have fallen behind on their subprime mortgages can now try to refinance with an FHA-insured mortgage.
By imposing its terms on both new and existing operations and requiring operators to reapply for existing licenses, the bill threatens contract sanctity and would increase the risk premium applied to future investment decisions.
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After adjusting for these factors, the authors argue that the best estimate of the equity risk premium worldwide in future is 4-5 percentage points.
The widening of the risk premium today is a major depressant because it has raised the cost of capital for everyone but the U.S Treasury.
From the other side, supporters of the shift to austerity believe it is both essential and appropriate: deficit spending cannot go on for ever, and by boosting firms' and households' confidence and lowering the risk premium on government debt, well-designed fiscal consolidation can actually boost growth.
Maine, Wyoming, and North Dakota showed the greatest increases for the week. (Read Debt Deal Cuts To Be Offset By Lagging Growth And Fiscal Risk Premium).
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