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A duration-based equity premium


  • Samih Antoine Azar


Theoretically the expected return on any financial asset need not equal the average of the actual return. In this paper, the expected equity premium is estimated based on two fundamentals: the Gordon dividend model with constant growth, and duration analysis. The result is that the ex ante, or expected, equity premium is around 3.24%, with a standard error between 0.30% and 0.87%. Taking 0.87% as the standard error, the 95% confidence interval is between 1.53% and 4.95%. These figures show clearly that the actual equity premium is much higher than the expected one. The reason for that is due to unpredictable changes in interest rates, and other growth rates.

Suggested Citation

  • Samih Antoine Azar, 2007. "A duration-based equity premium," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(6), pages 409-414.
  • Handle: RePEc:taf:apfelt:v:3:y:2007:i:6:p:409-414 DOI: 10.1080/17446540600806229

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    References listed on IDEAS

    1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
    2. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
    5. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    6. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    7. Hansen, Bruce E., 2000. "Testing for structural change in conditional models," Journal of Econometrics, Elsevier, vol. 97(1), pages 93-115, July.
    8. Pierre Perron, 2005. "Dealing with Structural Breaks," Boston University - Department of Economics - Working Papers Series WP2005-017, Boston University - Department of Economics.
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    Cited by:

    1. Samih Antoine Azar, 2013. "US Stocks and the US Dollar," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 4(4), pages 91-106, October.
    2. Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2012. "REIT modified duration and convexity," Economics and Business Letters, Oviedo University Press, vol. 1(3), pages 1-7.

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