FI Analysis 18: Swedish risk premia and monetary policy

2019-10-09 | Reports Stability Markets

A disorderly and abrupt increase in international market rates could lead to significantly higher term and equity risk premia. This is the conclusion of an analysis conducted by FI.

Due to the low interest rates in recent years, investors have turned to riskier assets in order to achieve a higher return. This has contributed to low risk premia.

The term premium is a form of compensation that investors require to invest in bonds with longer terms. Our results show that the term premium is affected to a greater extent by international market rates than by an unexpected increase in the policy rate in Sweden.

The equity risk premium reflects the difference between investors' expected return on the equity market and the risk-free rate. According to our results, the premium is not affected by changes in Swedish monetary policy. However, international market rates affect the equity risk premium in the short term.