The equity premium puzzle and the ex post bias

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The equity premium puzzle and the ex post bias

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Jakob Madsen
Ratbek Dzhumashev

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Abstract

This article argues that high historical excess returns to equity were the result of a severe ex post bias in the period from 1915 to ca 1960 because inflation surprises during this period drove a wedge between ex ante and ex post returns to bonds. Furthermore, it is shown that ex ante and ex post returns to stocks are identical in a steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.3-4.4% over the past 132 years.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 19 (2009)
Issue (Month): 2 ()
Pages: 157-174
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Handle: RePEc:taf:apfiec:v:19:y:2009:i:2:p:157-174

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Paper
- Jakob B. Madsen, 2004. "The Equity Premium Puzzle and the Ex Post Bias," FRU Working Papers 2004/01, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]

References listed on IDEAS
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Other versions:
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Madsen, Jakob B, 1998. "General Equilibrium Macroeconomic Models of Unemployment: Can They Explain the Unemployment Path in the OECD?," Economic Journal, Royal Economic Society, vol. 108(448), pages 850-67, May. [Downloadable!] (restricted)
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Other versions:
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Other versions:
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Other versions:
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Other versions:
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