Should-Read: Kevin Daly: A higher global risk premium and the fall in equilibrium real interest rates

Should-Read: Kevin Daly: A higher global risk premium and the fall in equilibrium real interest rates: “Since the turn of the century, the global economy has also been characterised by a rise in the yields on quoted equity…

…a feature for which the standard excess saving story cannot easily account…. An increase in the global risk premium has increased the wedge between risk-free interest rates and the real required return on risky investments…. Although there are differences between the savings glut and secular stagnation theses, a common implication of both is that excess saving has resulted in a generalised decline in yields across all assets, including but not restricted to real government bond yields (sometimes referred to as real ‘risk-free’ rates)…. The excess saving story is incomplete because it fails to account for the rise in the earnings yield on quoted equity from the early 2000s… a secular increase in the global ex ante equity risk premium…

What has driven the rise in the global risk premium since the turn of the century? One explanation is that the increasing importance of risk-averse investors in China and other emerging economies…. Another explanation (which does not exclude the first) is that it reflects the impact of population aging and pension regulation…