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Home > Insights > Research > Three Dogs That Did Not Bark: Risk Premia and Stock Market Shocks

Quantitative Research and Analytics

Three Dogs That Did Not Bark: Risk Premia and Stock Market Shocks

By Jamil Baz, Josh Davis, Normane Gillmann 24 March 2021

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Executive Summary

Thereʼs a bone of contention among investors: Are U.S. equity values about right or far too high?
Based on the equity risk premium, stocks are either marginally expensive or fairly valued (depending on the data window).
Yet standard valuation ratios – such as market capitalization-to-GDP, Tobin’s Q, CAPE and market cap-to-corporate profits – suggest stock prices are severely inflated.
Equity values are vulnerable to three types of risk premia: the conventional equity risk premium, the risk of monetary tightening and the prospect of decreasing inequality.

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The Author

Jamil Baz

Head of Client Solutions and Analytics

Josh Davis

Global Head of Risk Management

Normane Gillmann

Quantitative Research Analyst

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PIMCO Asia Pte Ltd
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Executive Summary

The Author

Jamil Baz

Josh Davis

Normane Gillmann

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