Musings on Markets: The Price of Risk

The article examines how markets price risk across different asset classes—bonds, equities, and real estate—through default spreads and equity risk premiums. It argues that equity risk premiums should be forward-looking and dynamic rather than historically-averaged, and presents an implied ERP of 5.20% for the S&P 500 as of January 2020 to frame debates about market valuation. The analysis suggests the market appears fairly valued or slightly underpriced relative to long-term historical premiums.