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Re-examination of the historical equity risk premium in Australia

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  • Tim Brailsford
  • John C. Handley
  • Krishnan Maheswaran

Abstract

In light of the ongoing debate over the value of the equity risk premium, its increasing use in the regulatory setting, and the impact of dividend imputation on the premium, this paper presents a timely new look at the historical equity risk premium in Australia, and provides an improved understanding of the historical record. We document concerns about data quality that become increasingly important the further back in time one looks. In particular, there are sufficient question marks over the quality of data prior to 1958 to warrant any estimates based thereon to be treated with caution. Accordingly, we present a new set of estimates of the historical equity risk premium corresponding to periods of increasing data quality but of decreasing sample size. Relative to bonds (bills), the equity premium has averaged 6.3 per cent (6.8 per cent) per annum over 1958-2005, which is a period of relatively good data quality. Together with other results in the paper, the findings reveal a historical estimate that is substantially less than widely cited historical studies would otherwise indicate. We reconcile prior evidence through documenting a dividend adjustment that has typically been overlooked. We also provide estimates that incorporate an adjustment for imputation credits. Copyright (c) The Authors.

Suggested Citation

  • Tim Brailsford & John C. Handley & Krishnan Maheswaran, 2008. "Re-examination of the historical equity risk premium in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 73-97.
  • Handle: RePEc:bla:acctfi:v:48:y:2008:i:1:p:73-97
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-629X.2007.00231.x
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    Cited by:

    1. Fernandez, Pablo & Aguirreamalloa, Javier & Corres, Luis, 2011. "Prima de riesgo del mercado utilizada para España: Encuesta 2011," IESE Research Papers D/921, IESE Business School.
    2. Peter J. Phillips, 2011. "Will Self‐Managed Superannuation Fund Investors Survive?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 44(1), pages 51-63, March.
    3. Robert J. Bianchi & Michael E. Drew & Timothy Whittaker, 2016. "The Predictive Performance of Asset Pricing Models: Evidence from the Australian Securities Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-18, December.
    4. Stephen Gray & Jason Hall & Drew Klease & Alan McCrystal, 2009. "Bias, stability, and predictive ability in the measurement of systematic risk," Accounting Research Journal, Emerald Group Publishing, vol. 22(3), pages 220-236, November.
    5. Jorge A Chan-Lau & Andre O Santos, 2010. "Public Debt Sustainability and Management in a Compound Option Framework," IMF Working Papers 10/2, International Monetary Fund.
    6. Peter J. Phillips & Michael Baczynski & John Teale, 2009. "Can self-managed superannuation fund trustees earn the equity risk premium?," Accounting Research Journal, Emerald Group Publishing, vol. 22(1), pages 27-45, July.
    7. Basu, Anup K. & Drew, Michael E., 2010. "The appropriateness of default investment options in defined contribution plans: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 290-305, June.
    8. Andrew C. Worthington, 2009. "Political Cycles in the Australian Stock Market since Federation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(4), pages 397-409.
    9. Tyrone M. Carlin & Nigel Finch, 2009. "Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing," Australian Accounting Review, CPA Australia, vol. 19(4), pages 326-336, December.
    10. repec:wyi:journl:002192 is not listed on IDEAS
    11. repec:bla:acctfi:v:57:y:2017:i:2:p:373-400 is not listed on IDEAS

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