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The Equity Premium and Structural Breaks

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  • LUBOŠ PÁSTOR
  • ROBERT F. STAMBAUGH

Abstract

A long return history is useful in estimating the current equity premium even if the historical distribution has experienced structural breaks. The long series helps not only if the timing of breaks is uncertain but also if one believes that large shifts in the premium are unlikely or that the premium is associated, in part, with volatility. Our framework incorporates these features along with a belief that prices are likely to move opposite to contemporaneous shifts in the premium. The estimated premium since 1834 fluctuates between 4 and 6 percent and exhibits its sharpest drop in the last decade. Copyright The American Finance Association 2001.

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Bibliographic Info

Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 519.

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Date of creation: Jun 2000
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Handle: RePEc:wop:chispw:519

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