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The UK Equity Premium: 1901-2004

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  • Andrew Vivian

Abstract

This paper examines the UK equity premium over more than a century using dividend growth to estimate expectations of capital gains employing the approach of Fama and French (2002) . Over recent decades estimated equity premia implied by dividend growth have been much lower than that produced by average stock returns for the UK market as a whole; a finding corroborated by all economic sub-sectors. The empirical analysis suggests this is primarily due to a declining discount rate, during the latter part of the 20th century, which would rationally stimulate unanticipated equity price rises during this period. Thus, I conclude that historical stock returns over recent decades have been above investors' expectations. Copyright 2007 The Author Journal compilation (c) 2007 Blackwell Publishing Ltd.

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  • Andrew Vivian, 2007. "The UK Equity Premium: 1901-2004," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9-10), pages 1496-1527.
  • Handle: RePEc:bla:jbfnac:v:34:y:2007-11:i:9-10:p:1496-1527
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    References listed on IDEAS

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    Cited by:

    1. van Ewijk, Casper & de Groot, Henri L.F. & Santing, A.J. (Coos), 2012. "A meta-analysis of the equity premium," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 819-830.
    2. Alan Gregory & Maria Michou, 2009. "Industry Cost of Equity Capital: UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 679-704.

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