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Estimating the equity premium

  • M. C. Freeman
  • I. R. Davidson
Registered author(s):

    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.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337073
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    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 5 (1999)
    Issue (Month): 3 ()
    Pages: 236-246

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    Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:236-246
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    7. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
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    10. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
    11. Andrew B. Abel, . "Exact Solutions for Expected Rates of Return Under Markov Regime Switching: Implications for the Equity Premium Puzzle," Rodney L. White Center for Financial Research Working Papers 9-92, Wharton School Rodney L. White Center for Financial Research.
    12. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
    13. Heaton, John & Lucas, Deborah, 1992. "The effects of incomplete insurance markets and trading costs in a consumption-based asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 601-620.
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    28. Ian Davidson & John Okunev & Mohammad Tahir, 1996. "Modelling the Equity Risk Premium in the Long Term," Working Paper Series 59, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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