The Equity Premium
AbstractRecent research on the equity risk premium has questioned the ability of historical estimates of the risk premium to provide reliable estimates of the expected risk premium. We calculate the equity risk premium for a number of countries over longer horizons than has been attempted to date. We show that the realised US equity premium is consistent with the premia obtained elsewhere. Furthermore, using well over a century of data, we find that current estimates of the equity premia are close to those observed during the pre-1914 era. This is of particular relevance given the argument that the financial environment during that period bears a closer resemblance to today than the 1914-1945 period, and possibly also the 1945-1971 period. This points to a current equity risk premium that is considerably lower than consensus forecasts (Welch 2001).
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Bibliographic InfoPaper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 04-10.
Length: 23 pages
Date of creation: Sep 2004
Date of revision:
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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK
Other versions of this item:
- NEP-ALL-2004-10-18 (All new papers)
- NEP-DGE-2004-10-18 (Dynamic General Equilibrium)
- NEP-FIN-2004-10-18 (Finance)
- NEP-RMG-2004-10-18 (Risk Management)
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