Expectations, uncertainty and risk premium

In: Journal of financial economic policy, Volume 9, Issue 3, p. 338-352

Abstract

PurposeThis study aims to examine short- and long-run effects of specific macroeconomic conditions on risk premium estimates on lending.Design/methodology/approachEmpirical estimates are based on error correction and autoregressive distributed lag models.FindingsThe results suggest that, in the short run, inflation expectations, recession expectations and actual inflationary conditions tend to have a significant impact on risk premium estimates; in the long run, however, only inflation expectations and recession expectations are significant in risk premium estimates on lending.Originality/valueThis study examines how specific conditions of uncertainty and expectations influence variability in risk premium estimates on lending in the US economy.