Advanced Search
MyIDEAS: Login to save this paper or follow this series

Estimating the Equity Premium

Contents:

Author Info

  • John Y. Campbell

Abstract

To estimate the equity premium, it is helpful to use finance theory: not the old-fashioned theory that efficient markets imply a constant equity premium, but theory that restricts the time-series behavior of valuation ratios, and that links the cross-section of stock prices to the level of the equity premium. Under plausible conditions, valuation ratios such as the dividend-price ratio should not have trends or explosive behavior. This fact can be used to strengthen the evidence for predictability in stock returns. Steady-state valuation models are also useful predictors of stock returns given the high degree of persistence in valuation ratios and the difficulty of estimating free parameters in regression models for stock returns. A steady-state approach suggests that the world geometric average equity premium was almost 4% at the end of March 2007, implying a world arithmetic average equity premium somewhat above 5%. Both valuation ratios and the cross-section of stock prices imply that the equity premium fell considerably in the late 20th Century, but has risen modestly in the early years of the 21st Century.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w13423.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13423.

as in new window
Length:
Date of creation: Sep 2007
Date of revision:
Publication status: published as John Y. Campbell, 2008. "Viewpoint: Estimating the equity premium," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 1-21, February.
Handle: RePEc:nbr:nberwo:13423

Note: AP ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Pontiff, Jeffrey & Schall, Lawrence D., 1998. "Book-to-market ratios as predictors of market returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(2), pages 141-160, August.
  2. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael Roberts, 2004. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," NBER Working Papers 10651, National Bureau of Economic Research, Inc.
  3. Walter Torous & Rossen Valkanov & Shu Yan, 2004. "On Predicting Stock Returns with Nearly Integrated Explanatory Variables," The Journal of Business, University of Chicago Press, vol. 77(4), pages 937-966, October.
  4. Campbell, John Y. & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(1), pages 27-60, July.
  5. Campbell, John, 2001. "Why Long Horizons? A Study of Power Against Persistent Alternatives," Scholarly Articles 3196341, Harvard University Department of Economics.
  6. Campbell, John & Shiller, Robert, 1988. "Stock Prices, Earnings, and Expected Dividends," Scholarly Articles 3224293, Harvard University Department of Economics.
  7. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  8. John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
  9. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 375-421, December.
  10. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 55(5), pages 2219-2257, October.
  11. John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
  12. Campbell, John, 1987. "Stock Returns and the Term Structure," Scholarly Articles 3207699, Harvard University Department of Economics.
  13. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
  14. Jessica A. Wachter & Missaka Warusawitharana, 2007. "Predictable Returns and Asset Allocation: Should a Skeptical Investor Time the Market?," NBER Working Papers 13165, National Bureau of Economic Research, Inc.
  15. Eugene Fama & F. & Kenneth R. French, . "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  16. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 23-49, November.
  17. Venkat R. Eleswarapu, 2004. "The Predictability of Aggregate Stock Market Returns: Evidence Based on Glamour Stocks," The Journal of Business, University of Chicago Press, vol. 77(2), pages 275-294, April.
  18. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 812, Cowles Foundation for Research in Economics, Yale University.
  19. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
  20. Alexander W. Butler & Gustavo Grullon & James P. Weston, 2005. "Can Managers Forecast Aggregate Market Returns?," Journal of Finance, American Finance Association, American Finance Association, vol. 60(2), pages 963-986, 04.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Paulo M.M. Rodrigues & Antonio Rubia, 2011. "A Class of Robust Tests in Augmented Predictive Regressions," Working Papers, Banco de Portugal, Economics and Research Department w201126, Banco de Portugal, Economics and Research Department.
  2. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains taxation in the real world," Working Papers, University of Brescia, Department of Economics 0910, University of Brescia, Department of Economics.
  3. Yannick Le Pen & Benoît Sévi, 2013. "Futures Trading and the Excess Comovement of Commodity Prices," Working Papers halshs-00793724, HAL.
  4. Walentin Karl, 2010. "Earnings Inequality and the Equity Premium," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 10(1), pages 1-23, November.
  5. Nieto, Belén & Rubio, Gonzalo, 2011. "The volatility of consumption-based stochastic discount factors and economic cycles," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(9), pages 2197-2216, September.
  6. Jessica A. Wachter & Missaka Warusawitharana, 2011. "What is the Chance that the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio," NBER Working Papers 17334, National Bureau of Economic Research, Inc.
  7. Ferreira, Miguel A. & Santa-Clara, Pedro, 2011. "Forecasting stock market returns: The sum of the parts is more than the whole," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(3), pages 514-537, June.
  8. Marcelo Bianconi & Joe A. Yoshino, 2012. "Empirical Estimation of the Cost of Equity: An Application to Selected Brazilian Utilities Companies," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 0765, Department of Economics, Tufts University.
  9. Dangl, Thomas & Halling, Michael, 2012. "Predictive regressions with time-varying coefficients," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(1), pages 157-181.
  10. repec:ipg:wpaper:19 is not listed on IDEAS
  11. Angelidis, Timotheos & Tessaromatis, Nikolaos, 2010. "The efficiency of Greek public pension fund portfolios," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(9), pages 2158-2167, September.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13423. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.