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The U.S. Equity Return Premium: Past, Present, and Future

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  • J. Bradford DeLong
  • Konstantin Magin
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    Abstract

    For more than a century, diversified long-horizon investments in America's stock market have consistently received much higher returns than investors in bonds: a return gap averaging 6 percent per year. An enormous amount of creative and ingenious work by a great many economists has gone into seeking explanations for the so-called "equity premium return puzzle," but so far without a fully satisfactory answer. We first review the facts about the equity premium and then discuss a range of explanations that have been proposed. We conclude that the equity premium puzzle has not been solved: it remains a puzzle. And we anticipate that the equity return premium will continue, albeit at a smaller level than in the past - perhaps four percent per year. (The final draft of this paper was written before the recent stock market crash. As of October 2008, we can say that the crash does not fundamentally alter our conclusions and actually strengthens the case for a substantial future equity premium.)

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.23.1.193
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Perspectives.

    Volume (Year): 23 (2009)
    Issue (Month): 1 (Winter)
    Pages: 193-208

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    Handle: RePEc:aea:jecper:v:23:y:2009:i:1:p:193-208

    Note: DOI: 10.1257/jep.23.1.193
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    1. James J. Heckman & Tim Kautz, 2013. "Fostering and Measuring Skills: Interventions That Improve Character and Cognition," NBER Working Papers 19656, National Bureau of Economic Research, Inc.
    2. James J. Heckman & Seong Hyeok Moon & Rodrigo Pinto & Peter A. Savelyev & Adam Yavitz, 2009. "The Rate of Return to the High/Scope Perry Preschool Program," Working Papers, Geary Institute, University College Dublin 200936, Geary Institute, University College Dublin.
    3. Sara LaLumia & James M. Sallee, 2011. "The Value of Honesty: Empirical Estimates from the Case of the Missing Children," NBER Working Papers 17247, National Bureau of Economic Research, Inc.
    4. Heckman, James J. & Kautz, Tim, 2012. "Hard evidence on soft skills," Labour Economics, Elsevier, Elsevier, vol. 19(4), pages 451-464.
    5. Michael R King, 2009. "The cost of equity for global banks: a CAPM perspective from 1990 to 2009," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, September.

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