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Survival Bias and the Equity Premium Puzzle

Author

Listed:
  • Haitao Li

    (Johnson Graduate School of Management, Cornell University,)

  • Yuewu Xu

    (TIAA-CREF)

Abstract

Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias. This relationship reveals the fundamental difficulty facing the survival argument: High survival bias requires an ex ante probability of market failure, which seems unrealistically high given the history of world financial markets. Copyright The American Finance Association 2002.

Suggested Citation

  • Haitao Li & Yuewu Xu, 2002. "Survival Bias and the Equity Premium Puzzle," Journal of Finance, American Finance Association, vol. 57(5), pages 1981-1995, October.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:1981-1995
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    Citations

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    Cited by:

    1. Ritter, Jay R., 2005. "Economic growth and equity returns," Pacific-Basin Finance Journal, Elsevier, vol. 13(5), pages 489-503, November.
    2. Kaustia, Markku & Lehtoranta, Antti & Puttonen, Vesa, 2013. "Does sophistication affect long-term return expectations? Evidence from financial advisers' exam scores," SAFE Working Paper Series 3, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    3. Prat, Georges, 2013. "Equity risk premium and time horizon: What do the U.S. secular data say?," Economic Modelling, Elsevier, vol. 34(C), pages 76-88.
    4. Bhanot, Karan, 2005. "What causes mean reversion in corporate bond index spreads? The impact of survival," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1385-1403, June.
    5. Fernandez, Pablo, 2006. "The equity premium in finance and valuation textbooks," IESE Research Papers D/657, IESE Business School.
    6. Marco Taboga, 2002. "The Realized Equity Premium has been Higher than Expected: Further Evidence," CeRP Working Papers 29, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    7. Fernandez, Pablo, 2004. "Are calculated betas good for anything?," IESE Research Papers D/555, IESE Business School.
    8. Fernandez, Pablo, 2005. "La prima de riesgo del mercado (market risk premium)," IESE Research Papers D/585, IESE Business School.
    9. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier.
    10. Fernandez, Pablo, 2004. "Market risk premium: Required, historical and expected," IESE Research Papers D/574, IESE Business School.
    11. Geoffrey J. Warren, 2008. "Implications for Asset Pricing Puzzles of a Roll-over Assumption for the Risk-Free Asset-super-," International Review of Finance, International Review of Finance Ltd., vol. 8(3-4), pages 125-157.

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