The long-run behavior of the S&P Composite Price Index and its risk premium
AbstractWe lay out here the basis for a long-term equity index model, with intent to extract the risk premium. This is done by first observing the behaviours of the S&P Composite price index, earnings and dividends over roughly 130 years of history, from 1871 to 1998, and then assessing whether they fit within an equilibrium and efficient-market framework. The notions of equilibrium and efficiency shall be defined and formalised here, as they relate to this work, using classical finance theory. The conclusions derived so far are twofold. First, there is a transition in the market’s behaviour at around 1945. It appears that prior to this, the dividend payment policy was, on aggregate, one of constant dividend yield. After this, the policy’s focus seems to have shifted towards achieving market equilibrium and efficiency. Second, the backward-looking risk premium during the post-transition period is found, in theory, to be simply the negative percent rate of change in dividend yield. Moreover, under the special-case scenario where the equity price is discounted at a constant “infinitehorizon” discount rate, the forward-looking risk premium becomes identically the dividend yield.
Download InfoIf 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.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 3192.
Date of creation: Apr 2000
Date of revision:
equity risk premium; S&P Composite Price Index; dividends; Gordon growth model;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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.:
- Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October.
- Grossman, Sanford J & Shiller, Robert J, 1981.
"The Determinants of the Variability of Stock Market Prices,"
American Economic Review,
American Economic Association, vol. 71(2), pages 222-27, May.
- Sanford J. Grossman & Robert J. Shiller, 1981. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
- S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
- Campa, Jose M. & Chang, P. H. Kevin & Reider, Robert L., 1998. "Implied exchange rate distributions: evidence from OTC option markets1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 117-160, February.
- Shiller, Robert J, 1981.
"Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?,"
American Economic Review,
American Economic Association, vol. 71(3), pages 421-36, June.
- Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
- Campa, Jose Manuel & Chang, P. H. Kevin, 1998.
"The forecasting ability of correlations implied in foreign exchange options,"
Journal of International Money and Finance,
Elsevier, vol. 17(6), pages 855-880, December.
- Jose M. Campa & P. H. Kevin Chang, 1997. "The Forecasting Ability of Correlations Implied in Foreign Exchange Options," NBER Working Papers 5974, National Bureau of Economic Research, Inc.
- Campa, J.M. & Chang, P.H.K., 1995. "The Forecasting Ability of Correlations Implied in Foreign Exchange Options," Papers 95-26, Columbia - Graduate School of Business.
- Finucane, Thomas J., 1991. "Put-Call Parity and Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(04), pages 445-457, December.
- Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 953-1001, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.