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Math Help - Risk premiums.

  1. #1
    Junior Member
    Joined
    Sep 2010
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    32

    Risk premiums.

    Hi all,

    I need help solving a problem.

    I have a risk premium of 2 % for a city called K. I also have the market size for that city (in number of people) and the number of days it takes to finish a deal.

    I have 30 other cities. I have to find the risk premium for all these cities based on the 2 % for city K with the help of the knowledge I have of all the market sizes for each city and the days it takes to finish a deal.

    SO what I want is to put a relation between the city K risk premium and the other cities. Let's say:

    City K has a risk premium of 2%. The market size is 20 people and trading days of 40.
    City B has a market size of 40 people and trading days of 10. The risk premium should be lower the bigger the market and the fewer the trading days.

    How do I derive a risk premium for city B? I know that ratio: market size City B / Market size City K = 2 and that the trading days city B / trading days city K = 0.25.

    Risk premium City B = Risk premium city K x ?

    I have tried asking other economists but they dont know. Pleaase help me find a methodology!

    I would really appreciate some help!
    Last edited by mr fantastic; August 13th 2011 at 03:30 PM. Reason: Re-titled.
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  2. #2
    Newbie
    Joined
    Apr 2009
    Posts
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    Re: Some economics but mostly maths, please help!

    A first guess would be that your risk premium is related to your independent variables as a ratio some thing like this;
    risk premium = parameter * trading days / market size

    so the bigger the marker, the lower the risk premium
    and as trading days decreases, the risk premium decrease

    so for city K, the initial condition is
    0.02 = parameter * 40 / 20

    so your parameter is valued 0.01, and therefore for city B you have this;
    city B = 0.01 * (0.25*40)/(2*20) = 0.0025

    so the risk premium is .25% using that model

    Obviously there could be some much more complicated relationship between those variates, and you would need more information to either suggest a model or test the fitted model.
    Last edited by tolland; August 12th 2011 at 10:19 AM.
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