If NOW fails to win the bidding, the

risk premium will increase, raising the minimum return while the expected growth rate falls, resulting in higher risk adjusted rate.

Comparing the equity

risk premium of the US market with the one of the Euro zone shows that the US is well below its long- term average (at 3.

We use the term

risk premium to refer to these premium loadings.

Conditional models have advantages: estimated Betas are not constant and depend on the economic cycle (Zang, 2006); they better capture structural changes in the

risk premium (for example, Lettau et al, 2008); the aggregate

risk premium would be partially predictable (for example, Lettau and Ludvigson, 2001; Cochrane, 2008; and Campbell and Thompson, 2008), which can only be captured with conditional models; reference interest (risk-free) rates clearly vary over time.

Observe that his

risk premium increases in G(n) and decreases in [SIGMA][m.

As one can see from (4) and (5) both the value of the risk-free rate and the size of the

risk premium depend on four parameters: discount factor ([beta]), relative risk aversion ([alpha]) and possible rates of growth of consumption ([g.

Second, an ERR reduces the mean and the volatility of the

risk premium that causes deviations from UIP.

As a result, any analysis of the market price of risk must include multiple

risk premium measures.

In each instance the appreciation has been generated in the same manner, by exogenously shocking the

risk premium associated with the given country (see equation 1).

Therefore, if money market interest rates are zero, and junk bonds now also trade at close to zero, the

risk premium has become compressed, has become very small, insufficient to compensate the investor when a correction happens.

22 under the indifferent deductible program with an 86% threshold, so the

risk premium is $0.

If this assumption is correct, then the incorporation of a

risk premium into carbon dioxide emissions prices has the paradoxical effect of reducing the appropriate price relative to consideration of the expected (average) damages alone.