The interaction between the equity premium and the risk-free rate

The equity premium arises from the interaction between the atemporal risk premium for equity, the risk-free rate of intertemporal substitution and the impact of risk on the precautionary motive for saving. Depending on parameter values, the equity premium may either be increased or reduced by the presence of undiversifiable background risk. (C) 2000 Elsevier Science S.A. All rights reserved.

Public investment and the risk premium for equity

Analysis of the equity premium puzzle has focused on private-sector capital markets. However, the existence of an anomalous equity premium raises important issues in the evaluation of public-sector investment projects. These issues are explored below. We begin by formalizing the argument that an equity premium may arise from uninsurable systematic risk in labour income, and show that, other things being equal, increases in public ownership of equity will improve welfare, up to the point where the equity premium is eliminated. Finally, we consider policy implications and the optimal extent of public ownership.

Market reaction to takeover rumour in internet discussion sites

We examine the market reaction to takeover rumour postings in the Hotcopper Internet Discussion Site (IDS). Results from the interday analysis show abnormal returns and trading volumes on the day before and the day of the posting. Results of the intraday analysis show abnormal returns and trading volumes during the 10 min posting interval and abnormal trading volume during the 10 min interval immediately preceding it. Sensitivity analyses indicate that the results are robust to concerns regarding potential confounds, credibility and bid–ask spread bias. Taken together, these findings are consistent with the market reacting to the posting of takeover rumours in IDS.

Relationship between franking credits and the market risk premium

In a dividend imputation tax system, equity investors have three potential sources of return: dividends, capital gains and franking (tax) credits. However, the standard procedures for estimating the market risk premium (MRP) for use in the capital asset pricing model, ignore the value of franking credits. Officer (1994) notes that if franking credits do affect the corporate cost of capital, their value must be added to the standard estimates of MRP. In the present paper, we explicitly derive the relationship between the value of franking credits (gamma) and the MRP. We show that the standard parameter estimates that have been adopted in practice (especially by Australian regulators) violate this deterministic mathematical relationship. We also show how information on dividend yields and effective tax rates bounds the values that can be reasonably used for gamma and the MRP. We make recommendations for how estimates of the MRP should be adjusted to reflect the value of franking credits in an internally consistent manner.

The risk premium for equity: implications for resource allocation, welfare and policy

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first-best outcome implied by a given explanation of the equity premium puzzle, the more interventionist are the implied policy conclusions. Nevertheless, even explanations of the equity premium puzzle consistent with a general consumption-based asset pricing model have important welfare and policy implications.

Response to price and production risk: The case of Australian wheat

A model of Australian wheat grower supply response was specified under the constraints of price and yield uncertainty, risk aversion, partial adjustment, and quadratic costs. The model was solved to obtain area planted. The results of estimation indicate that risk arising from prices and climate have had a significant influence on producer decision making. The coefficient of relative risk aversion and short-run and long-run elasticities of supply with respect to price were calculated. Wheat growers' risk premium, expected at the start of the season for exposed price and yield risk, was 2.8 percent of revenue or 10.4 percent of profit as measured by producer surplus. (C) 2000 John Wiley & Sons, Inc.

Noise trader risk and the welfare effects of privatization

Excessive volatility of asset prices like that generated in the 'noise trader' model of De Long et al. is one factor that plausibly might contribute to an explanation of the equity premium. We extend the De Long et al. model to allow for privatization of publicly-owned assets and assess the welfare effects of such privatization in the presence of excess volatility arising from noise traders' mistaken beliefs.

Choosing organics: A path analysis of factors underlying the selection of organic food among Australian consumers

Path analysis of attitudinal, motivational, demographic and behavioural factors influencing food choice among Australian consumers who had consumed at least some organic food in the preceding 12 months showed that concern with the naturalness of food and the sensory and emotional experience of eating were the major determinants of increasing levels of organic consumption. Increasing consumption was also related to other 'green consumption' behaviours such as recycling and to lower levels of concern with convenience in the purchase and preparation of food. Most of these factors were, in turn, strongly affected by gender and the level of responsibility taken by respondents for food provisioning within their households, a responsibility dominated by women. Education had a slightly negative effect on the levels of concern for sensory and emotional appeal due to lower levels of education among women. Income, age, political and ecological values and willingness to pay a premium for safe and environmentally friendly foods all had extremely minor effects. (C) 2004 Elsevier Ltd. All rights reserved.

Mobile message services and communications policy

Something of a design after-thought, mobile phone SMS (Short-Message Services) have been enthusiastically adopted by consumers worldwide, who have created a new text culture. SMS is now being deployed to provide a range of services and transactions, as well as playing a critical role in offering an interactive path for television broadcasting. In this paper we offer a case study of a lucrative, new industry developing internationally at the intersection of telecommunications, broadcasting, and information services—namely, premium rate SMS/MMS. To explore the issues at stake we focus on an Australian case study of policy responses to the development of premium rate mobile messaging services in the 2002-2005 period. In the first part, we give a brief history of premium rate telecommunications. Secondly, we characterise premium rate mobile message services and examine their emergence. Thirdly, we discuss the responses of Australian policy-makers and industry to these services. Fourthly, we place the Australian experience in international context, and indicate common issues. Finally, we draw some conclusions from the peregrinations of mobile message services for regulators grappling with communications policy frameworks.

Modulation of macrophage immune responses by Echinacea

Echinacea preparations are widely used herbal medicines for the prevention and treatment of colds and minor infections. There is little evidence for the individual components in Echinacea that contribute to immune regulatory activity. Activity of an ethanolic Echinacea extract and several constituents, including cichoric acid, have been examined using three in vitro measures of macrophage immune function - NF-kappa B, TNF-alpha and nitric oxide (NO). In cultured macrophages, all components except the monoene alkylamide (AA1) decreased lipopolysaccharide (LPS) stimulated NF-kappa B levels. 0.2 mu g/ml cichoric acid and 2.0 mu g/mL Echinacea Premium Liquid (EPL) and EPL alkylamide fraction (EPL AA) were found to significantly decrease TNF-alpha production under LPS stimulated conditions in macrophages. In macrophages, only the alkylamide mixture isolated from the ethanolic Echinacea extract decreased LPS stimulated NO production. In this study, the mixture of alkylamides in the Echinacea ethanolic liquid extract did not respond in the same manner in the assays as the individual alkylamides investigated. While cichoric acid has been shown to affect NF-kappa B, TNF-alpha and NO levels, it is unlikely to be relevant in the Echinacea alterations of the immune response in vivo due to its nonbioavailability - i.e. no demonstrated absorption across the intestinal barrier and no detectable levels in plasma. These results demonstrate that Echinacea is an effective modulator of macrophage immune responses in vitro.