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Re-examination of the historical equity risk premium in Australia

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  • Tim Brailsford
  • John C. Handley
  • Krishnan Maheswaran
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    Abstract

    In light of the ongoing debate over the value of the equity risk premium, its increasing use in the regulatory setting, and the impact of dividend imputation on the premium, this paper presents a timely new look at the historical equity risk premium in Australia, and provides an improved understanding of the historical record. We document concerns about data quality that become increasingly important the further back in time one looks. In particular, there are sufficient question marks over the quality of data prior to 1958 to warrant any estimates based thereon to be treated with caution. Accordingly, we present a new set of estimates of the historical equity risk premium corresponding to periods of increasing data quality but of decreasing sample size. Relative to bonds (bills), the equity premium has averaged 6.3 per cent (6.8 per cent) per annum over 1958-2005, which is a period of relatively good data quality. Together with other results in the paper, the findings reveal a historical estimate that is substantially less than widely cited historical studies would otherwise indicate. We reconcile prior evidence through documenting a dividend adjustment that has typically been overlooked. We also provide estimates that incorporate an adjustment for imputation credits. Copyright (c) The Authors.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-629X.2007.00231.x
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    Bibliographic Info

    Article provided by Accounting and Finance Association of Australia and New Zealand in its journal Accounting & Finance.

    Volume (Year): 48 (2008)
    Issue (Month): 1 ()
    Pages: 73-97

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    Handle: RePEc:bla:acctfi:v:48:y:2008:i:1:p:73-97

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    Cited by:
    1. Peter J. Phillips & Michael Baczynski & John Teale, 2009. "Can self-managed superannuation fund trustees earn the equity risk premium?," Accounting Research Journal, Emerald Group Publishing, vol. 22(1), pages .27-45, July.
    2. Basu, Anup K. & Drew, Michael E., 2010. "The appropriateness of default investment options in defined contribution plans: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 290-305, June.
    3. Jorge A. Chan-Lau & Andre Santos, 2010. "Public Debt Sustainability and Management in a Compound Option Framework," IMF Working Papers 10/2, International Monetary Fund.
    4. Stephen Gray, & Jason Hall & Drew Kleas & Alan McCrystal, 2009. "Bias, stability, and predictive ability in the measurement of systematic risk," Accounting Research Journal, Emerald Group Publishing, vol. 22(3), pages 220-236, November.
    5. Fernandez, Pablo & Aguirreamalloa, Javier & Corres, Luis, 2011. "Prima de riesgo del mercado utilizada para EspaƱa: Encuesta 2011," IESE Research Papers D/921, IESE Business School.
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