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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 Heckman & Tim Kautz, 2013. "Fostering and Measuring Skills: Interventions That Improve Character and Cognition," Working Papers 2013-019, Human Capital and Economic Opportunity Working Group.
    2. Sara LaLumia & James Sallee, 2013. "The value of honesty: empirical estimates from the case of the missing children," International Tax and Public Finance, Springer, vol. 20(2), pages 192-224, April.
    3. Heckman, James J. & Kautz, Tim, 2012. "Hard evidence on soft skills," Labour Economics, Elsevier, vol. 19(4), pages 451-464.
    4. Heckman, James J. & Moon, Seong Hyeok & Pinto, Rodrigo & Savelyev, Peter A. & Yavitz, Adam, 2010. "The rate of return to the HighScope Perry Preschool Program," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 114-128, February.
    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, September.

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