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Estimating the equity premium

Author

Listed:
  • M. C. Freeman
  • I. R. Davidson

Abstract

Accurate estimation of the equity premium (the expected difference between the returns to a well-diversified stock market portfolio and a riskfree asset) is of central importance in many applications of finance theory including project appraisal and portfolio selection. The standard approach is to take the average observed excess returns to the market over some recent time period (sometimes referred to as the ex post equity premium) and apply this as an unbiased estimate of the ex ante equity premium. The paper reviews the problems associated with such an approach and contrasts it with alternative theoretical techniques.

Suggested Citation

  • M. C. Freeman & I. R. Davidson, 1999. "Estimating the equity premium," The European Journal of Finance, Taylor & Francis Journals, vol. 5(3), pages 236-246.
  • Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:236-246
    DOI: 10.1080/135184799337073
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    References listed on IDEAS

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    Cited by:

    1. David Schröder, 2005. "The Implied Equity Risk Premium - An Evaluation of Empirical Methods," Bonn Econ Discussion Papers bgse13_2005, University of Bonn, Germany.

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