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The equity premium in 100 textbooks

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Author Info

  • Fernandez, Pablo

    ()
    (IESE Business School)

Abstract

I review 100 finance and valuation textbooks published between 1979 and 2008 by authors such as Brealey and Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, Weston, Brigham and Arzac and find that their recommendations regarding the equity premium range from 3% to 10%. I also find that several books use different equity premia on different pages. Some of the confusion arises from not distinguishing among the four concepts that the term equity premium designates: historical equity premium, expected equity premium, required equity premium and implied equity premium. Finance textbooks should clarify the equity premium by providing distinguishing definitions of these four concepts and conveying a clearer message about their sensible magnitudes.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/757.

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Length: 26 pages
Date of creation: 13 Jul 2008
Date of revision:
Handle: RePEc:ebg:iesewp:d-0757

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: equity premium; equity premium puzzle; required market risk premium; historical market risk premium; expected market risk premium; risk premium; market risk premium; market premium;

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References

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  1. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
  2. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
  3. Goetzmann, William N. & Ibbotson, Roger G., 2006. "The Equity Risk Premium: Essays and Explorations," OUP Catalogue, Oxford University Press, number 9780195148145.
  4. Ivo Welch, 2001. "The Equity Premium Consensus Forecast Revisited," Cowles Foundation Discussion Papers 1325, Cowles Foundation for Research in Economics, Yale University.
  5. Robert S. Harris & Felicia C. Marston & Dev R. Mishra & Thomas J. O’Brien, 2003. "Ex Ante Cost of Equity Estimates of S&P 500 Firms: The Choice Between Global and Domestic CAPM," Financial Management, Financial Management Association, vol. 32(3), Fall.
  6. James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
  7. Ivo Welch, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," Yale School of Management Working Papers ysm122, Yale School of Management.
  8. Fernandez, Pablo, 2006. "Equity premium: Historical, expected, required and implied," IESE Research Papers D/661, IESE Business School.
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Cited by:
  1. Liu, Yuan-Chi, 2009. "The slicing approach to valuing tax shields," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1069-1078, June.

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