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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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Disclosures

Toronto
PIMCO Canada Corp.
199 Bay Street, Suite 2050
Commerce Court Station
P.O. Box 363
Toronto, ON, M5L 1G2
416-368-3350

The products and services provided by PIMCO Canada Corp. may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose.

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Executive Summary

The Author

Jamil Baz

Josh Davis

Normane Gillmann

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