Essays on risk premia in financial markets

Abstract

A risk premium that an investor requires for bearing risk is determined by several factors. The size of risk above all is the most important factor which affects a risk premium. For example, an investor who holds a highly volatile asset requires a high risk premium, whereas an investor who holds a stable asset requires a relatively low risk premium. However, the size of risk is not an only factor affecting a risk premium. If some costs exist when holding risky assets, they can enlarge the size of a risk premium. In contrast, if some risks cannot change an investor`s utility, the risk premium for those risks might be absent. This thesis presents and analyzes such factors which are related to risk premia. The thesis can be divided into two subjects broadly. The former part consisting of chapter 2 and 3 proposes a new type of information cost and examines its effects on risk premia; on the other hand, the other part in chapter 4 investigates the existence of risk which might be unrelated to investors` utility. In the former, the information costs are measured as time required for managing risky assets. Given that economic agents are endowed with a limited amount of time, they should allocate this scarce resource to several activities for their benifit. Typically, risky asset investment requires an in-depth analysis including conducting research and monitoring its performance, and thus, this effort generates a significant amount of time, which in turn induces a opportunity cost. Hence, even assets paying identical payoff streams might have different prices if they need different amount of time for information acquisition. Based on this concept, the former part of the thesis presents a new type of information cost and explores its effect on risky asset dynamics. This type of cost can help us understand the asset pricing conundrums such as equity premium puzzle, volatility puzzle, and limited participation puzzle. Chapter 2 focuses on the explanation...