Equity Risk Premium and rising interest rates
Hi,
What is the impact of rising interest rates on Equity Risk Premium? Any feedback could be good.
Thanks.
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ERP = Expected Equity Return - Risk Free Rate
When the rates increase, you are subtracting a larger number so the ERP decreases
but that's assuming the risk of equities stays the same. You're assuming since its backwards looking it wouldn't change? My intuition is that spread stays constant. Say if interest rates were suddenly 10% and that was considered "risk-free" surely equity investors would demand the same spread - it's not like it would become 0% (assuming equity return was originally 10%) since there is risk there. Thoughts?
1st time I heard that risk premia goes down during monetary tightening.
lol
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