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A meta-analysis of the equity premium

  • Casper van Ewijk

    ()

  • C. Santing

The literature on the equity premium vigorously debates how to measure the premium, what is its size and what determines its variation. This study provides a quantitative survey of the literature through a meta-analysis. We identify how the size of the equity premium depends on the way it is measured, along with its evolution over time and its variation across regions in the world. We find that the equity premium is significantly lower in measurements by ex ante rather than ex post methods, in more recent periods, and�in more developed countries. Looking at the underlying fundamentals, we find that larger volatility in GDP growth tends to raise the equity premium, while a higher nominal interest rate has a negative impact on the equity premium. �

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Paper with number 156.

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Date of creation: Aug 2010
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Handle: RePEc:cpb:discus:156
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  1. Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," NBER Working Papers 10270, National Bureau of Economic Research, Inc.
  2. Ville, Simon, 2006. "The Equity Premium Puzzle: Australia and the United States in Comparative Perspective," Economics Working Papers wp06-25, School of Economics, University of Wollongong, NSW, Australia.
  3. Andrew Vivian, 2007. "The UK Equity Premium: 1901-2004," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9-10), pages 1496-1527.
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  5. Robert J. Barro, 2005. "Rare Events and the Equity Premium," NBER Working Papers 11310, National Bureau of Economic Research, Inc.
  6. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
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  8. Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
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  10. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  11. John Y. Campbell, 2008. "Viewpoint: Estimating the equity premium," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 1-21, February.
  12. Fernandez, Pablo, 2009. "Market risk premium used in 2008 by Professors: A survey with 1,400 answers," IESE Research Papers D/796, IESE Business School.
  13. Shackman, Joshua D., 2006. "The equity premium and market integration: Evidence from international data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 155-179, April.
  14. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
  15. Jakob B. Madsen, 2004. "The Equity Premium Puzzle and the Ex Post Bias," FRU Working Papers 2004/01, University of Copenhagen. Department of Economics. Finance Research Unit.
  16. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
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  19. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06.
  20. World Bank, 2006. "World Development Indicators 2006," World Bank Publications, The World Bank, number 8151.
  21. James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
  22. Roger G. Ibbotson & Peng Chen, 2003. "Long-Run Stock Returns: Participating in the Real Economy," Yale School of Management Working Papers ysm354, Yale School of Management.
  23. Brown, Stephen J & Goetzmann, William N & Ross, Stephen A, 1995. " Survival," Journal of Finance, American Finance Association, vol. 50(3), pages 853-73, July.
  24. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-37, October.
  25. De Santis Massimiliano, 2007. "Movements in the Equity Premium: Evidence from a Time-Varying VAR," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 11(4), pages 1-41, December.
  26. Siegel, Jeremy J., 1992. "The real rate of interest from 1800-1990 : A study of the U.S. and the U.K," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 227-252, April.
  27. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
  28. Lemke, Wolfgang & Werner, Thomas, 2009. "The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics," Working Paper Series 1045, European Central Bank.
  29. Abbas Mirakhor & S. Nuri Erbas, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund.
  30. Kyriacos Kyriacou & Jakob B. Madsen & Bryan Mase, 2006. "Does inflation exaggerate the equity premium?," Journal of Economic Studies, Emerald Group Publishing, vol. 33(5), pages 344-356, November.
  31. Fabio Canova & Gianni De Nicoló, 2003. "The Properties of the Equity Premium and the Risk-Free Rate: An Investigation Across Time and Countries," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 4.
  32. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
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