| The risk premiums on the Tel Aviv 25 index and on the NIS/US$ exchange rate have fallen in the last few years, and in particular in the last two years. Between 1997 and 2005 the risk premium on the Tel Aviv 25 index declined from about 6 percent to 3.5 percent, and that on the NIS/US$ exchange rate from about 2 percent to 1 percent. These are the findings of research carried out by Elena Pompushko (of the Bank of Israel Monetary Department) and Yoel Hecht (of the Banking Supervision Department). |
| The research presents a new method for measuring the risk premium on assets traded in the capital market, which enables the premium to be calculated on a continuous basis in the course of trading on the stock exchange. |
| The risk premium is the excess return required by investors on their investment in a financial asset. The higher the perceived risk of an asset, the higher the return required to compensate for the risk. |
| The authors calculated the risk premium each day for the Tel Aviv 25 index and for the NIS/US$ exchange rate for the years 1997 to 2005. They note that the downward trend in risk premiums is characteristic of other markets throughout the world too. |
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| The complete research paper is published as part of the Discussion Paper series of Monetary Studies. |