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The U.S. Equity Return Premium: Past, Present, and Future

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  • J. Bradford DeLong
  • Konstantin Magin

Abstract

For more than a century, diversified long-horizon investments in America's stock market have consistently received much higher returns than investors in bonds: a return gap averaging 6 percent per year. An enormous amount of creative and ingenious work by a great many economists has gone into seeking explanations for the so-called "equity premium return puzzle," but so far without a fully satisfactory answer. We first review the facts about the equity premium and then discuss a range of explanations that have been proposed. We conclude that the equity premium puzzle has not been solved: it remains a puzzle. And we anticipate that the equity return premium will continue, albeit at a smaller level than in the past - perhaps four percent per year. (The final draft of this paper was written before the recent stock market crash. As of October 2008, we can say that the crash does not fundamentally alter our conclusions and actually strengthens the case for a substantial future equity premium.)

Suggested Citation

  • J. Bradford DeLong & Konstantin Magin, 2009. "The U.S. Equity Return Premium: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 193-208, Winter.
  • Handle: RePEc:aea:jecper:v:23:y:2009:i:1:p:193-208 Note: DOI: 10.1257/jep.23.1.193
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heckman, James J. & Kautz, Tim, 2012. "Hard evidence on soft skills," Labour Economics, Elsevier, vol. 19(4), pages 451-464.
    2. Jędrzej Białkowski & Ehud I. Ronn, 2017. "The Global Equity Premium Revisited: What Human Rights Imply for Assets’ Purchasing Power," Working Papers in Economics 17/19, University of Canterbury, Department of Economics and Finance.
    3. Sara LaLumia & James Sallee, 2013. "The value of honesty: empirical estimates from the case of the missing children," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(2), pages 192-224, April.
    4. repec:kap:enreec:v:67:y:2017:i:1:d:10.1007_s10640-015-9978-x is not listed on IDEAS
    5. James J. Heckman & Tim Kautz, 2013. "Fostering and Measuring Skills: Interventions That Improve Character and Cognition," NBER Working Papers 19656, National Bureau of Economic Research, Inc.
    6. Mariia Belaia & Michael Funke & Nicole Glanemann, 2017. "Global Warming and a Potential Tipping Point in the Atlantic Thermohaline Circulation: The Role of Risk Aversion," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 93-125.
    7. repec:eee:jfinec:v:125:y:2017:i:3:p:589-609 is not listed on IDEAS
    8. Heckman, James J. & Moon, Seong Hyeok & Pinto, Rodrigo & Savelyev, Peter A. & Yavitz, Adam, 2010. "The rate of return to the HighScope Perry Preschool Program," Journal of Public Economics, Elsevier, pages 114-128.
    9. Abramov, Alexander & Radygin, Alexander & Chernova, Maria, 2015. "Long-term portfolio investments: New insight into return and risk," Russian Journal of Economics, Elsevier, vol. 1(3), pages 273-293.
    10. Michael R King, 2009. "The cost of equity for global banks: a CAPM perspective from 1990 to 2009," BIS Quarterly Review, Bank for International Settlements, September.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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