The Equity Premium Puzzle and the Ex Post Bias
AbstractThis paper argues that the high historical excess returns to equity are1 a result of a severe ex post bias over the period from 1915 to circa 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 shares are identical in steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.5-3.9% over the past 130 years.
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Bibliographic InfoPaper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2004/01.
Length: 19 pages
Date of creation: Oct 2004
Date of revision:
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equity premium; inflation expectations; expected returns;
Other versions of this item:
- G0 - Financial Economics - - General
- E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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- Philip Jagd & Jakob Madsen, 2009. "Myopic loss aversion, bond returns and the equity premium puzzle," Applied Financial Economics, Taylor & Francis Journals, vol. 19(17), pages 1383-1390.
- Casper van Ewijk & C. Santing, 2010.
"A meta-analysis of the equity premium,"
CPB Discussion Paper
156, CPB Netherlands Bureau for Economic Policy Analysis.
- Rieger, Marc Oliver & Wang, Mei, 2012. "Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data," Finance Research Letters, Elsevier, vol. 9(2), pages 63-72.
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