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Measuring the equity risk premium

Author

Listed:
  • P Best

    (Old Mutual Asset Managers Limited)

  • A Byrne

    (Head of Investment Strategy at AEGON Asset Management in Edinburgh)

Abstract

We use surveys of economic forecasts to derive a forward-looking estimate of the US equity risk premium (ERP) relative to government bonds. Our ERP measure helps predict short-term relative returns between stocks and bonds. Over the period we studied, low readings of the ERP tended to adjust back to the mean via a rally in the bond market rather than a fall in stock prices. We do not generalise from this result, however, as our sample period is characterised by strong trends of falling inflation and rising stock prices. Our estimate of the expected ERP — averaging just over 2 per cent — is markedly lower than the premium that historical studies show has been realised. Data from the UK paint a similar picture to the US experience.

Suggested Citation

  • P Best & A Byrne, 2001. "Measuring the equity risk premium," Journal of Asset Management, Palgrave Macmillan, vol. 1(3), pages 245-256, January.
    • Handle: RePEc:pal:assmgt:v:1:y:2001:i:3:d:10.1057_palgrave.jam.2240019
    DOI: 10.1057/palgrave.jam.2240019
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    Cited by:

    1. Rochon, Mathieu & Desrosiers, Stéphanie & L’Her, Jean-François, 2004. "Révision à la baisse de la prime sur les actions au Canada," L'Actualité Economique, Société Canadienne de Science Economique, vol. 80(1), pages 137-170, Mars.

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