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The Risk-Free Rate’s Impact on Stock Returns with Representative Fund Managers

Gardtman, Daniel LU and Svensson, Simon LU (2013) FEKN90 20131
Department of Business Administration
Abstract
In this thesis, the risk-free rate’s impact on stock market excess returns was examined. Firstly, theoretical arguments were made for that a low risk-free rate might lower the excess return on the stock market, since this increases the incentive for fund managers to increase variance of returns. Under the assumption that fund managers affect the preferences of the representative investor, propositions regarding stock returns and the risk-free rate were made. Using the time series of stochastic volatility risk premium estimates created by Bollerslev, Gibson and Zhou’s (2011), it was tested if investor risk aversion is lower when the risk-free rate is low. The risk-free rate’s impact on the cross-section of stock returns was tested through... (More)
In this thesis, the risk-free rate’s impact on stock market excess returns was examined. Firstly, theoretical arguments were made for that a low risk-free rate might lower the excess return on the stock market, since this increases the incentive for fund managers to increase variance of returns. Under the assumption that fund managers affect the preferences of the representative investor, propositions regarding stock returns and the risk-free rate were made. Using the time series of stochastic volatility risk premium estimates created by Bollerslev, Gibson and Zhou’s (2011), it was tested if investor risk aversion is lower when the risk-free rate is low. The risk-free rate’s impact on the cross-section of stock returns was tested through the same methodology used by Black, Jensen, Scholes (1972) with independent variables linked to the risk-free rate added. Support for lower risk aversion during periods of a low risk-free rate was found. In opposite to the proposition regarding the cross-section of stock returns, the tests suggest that excess returns for all portfolios are higher when the risk-free rate is low. (Less)
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author
Gardtman, Daniel LU and Svensson, Simon LU
supervisor
organization
course
FEKN90 20131
year
type
H1 - Master's Degree (One Year)
subject
keywords
Asset Pricing, Agency Problem, Fund Managers, Risk-Free Rate, Risk Aversion, Stock Returns
language
English
id
3920782
date added to LUP
2013-08-13 10:35:55
date last changed
2013-08-13 10:35:55
@misc{3920782,
  abstract     = {In this thesis, the risk-free rate’s impact on stock market excess returns was examined. Firstly, theoretical arguments were made for that a low risk-free rate might lower the excess return on the stock market, since this increases the incentive for fund managers to increase variance of returns. Under the assumption that fund managers affect the preferences of the representative investor, propositions regarding stock returns and the risk-free rate were made. Using the time series of stochastic volatility risk premium estimates created by Bollerslev, Gibson and Zhou’s (2011), it was tested if investor risk aversion is lower when the risk-free rate is low. The risk-free rate’s impact on the cross-section of stock returns was tested through the same methodology used by Black, Jensen, Scholes (1972) with independent variables linked to the risk-free rate added. Support for lower risk aversion during periods of a low risk-free rate was found. In opposite to the proposition regarding the cross-section of stock returns, the tests suggest that excess returns for all portfolios are higher when the risk-free rate is low.},
  author       = {Gardtman, Daniel and Svensson, Simon},
  keyword      = {Asset Pricing,Agency Problem,Fund Managers,Risk-Free Rate,Risk Aversion,Stock Returns},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Risk-Free Rate’s Impact on Stock Returns with Representative Fund Managers},
  year         = {2013},
}