The Equity Risk Premium and the Required Share Returns in a Tobin’s q Model
AbstractBased on the Tobin’s q principle this paper shows that earnings per unit of capital and the output capital ratio are excellent measures of the required share returns because they are only temporarily affected by earnings shocks but are driven permanently by changes in required share returns. Evidence for the US over the period from 1889 to 2002 suggests that real required share returns and the equity risk premium climbed to extraordinarily high levels from the late 1930, to the end of the 1940s, and have since declined. The risk premium is currently somewhere between 4 and 6%.
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Bibliographic InfoPaper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 03-10.
Length: 20 pages
Date of creation: Sep 2003
Date of revision:
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More information through EDIRC
expected share returns; equity risk premium; Tobin’s q; share valuation; macroeconomic factors;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-09-08 (All new papers)
- NEP-CFN-2003-09-08 (Corporate Finance)
- NEP-MAC-2003-09-08 (Macroeconomics)
- NEP-RMG-2003-09-08 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Average Debt and Equity Returns: Puzzling?,"
Levine's Working Paper Archive
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- Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2001.
"The Declining U.S. Equity Premium,"
NBER Working Papers
8172, National Bureau of Economic Research, Inc.
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