Financial Instruments and Markets: A Casebook

7

Deutsche Bank: Discussing the Equity Risk Premium

Jamil Baz, global head of fixed income research at Deutsche Bank, sat down at the conference table in his office with George Cooper, the group's global fixed income strategist. It was August 2003, and for the better part of two years, the two had been discussing with their clients the danger of overstating the equity risk premium (ERP) when comparing bonds and equities. Cooper had now put together a presentation to justify this argument. Both Baz and Cooper believed that their advice added value to their clients' activities. They just wanted to go through the presentation one last time, making sure the arguments were well presented for their target audience.

THE DEUTSCHE BANK FIXED INCOME RESEARCH GROUP

Baz joined Deutsche Bank in 2001 as a managing director. The Fixed Income Research Group, which he headed, was Deutsche Bank's internal research and development (R&D) department for fixed income instruments. Their mandate was to look for untapped value across bond markets and interest rate derivatives. Based in Deutsche Bank's London office, the research group consisted of about 50 analysts and strategists. (Of these, about 10 were located in the bank's New York offices.)

As a part of a large financial institution, the research group was under constant pressure to monetize the ideas that they generated. Immediate opportunities were suggested as trades to internal traders as well as clients, whereas long-term-oriented research findings ...