Market risk premium: Required, historical and expected
The market risk premium is one of the most important but elusive parameters in finance. It is also called equity premium, market premium and risk premium. The term 'market risk premium' is difficult to understand because it is used to designate three different concepts: 1) Required market risk premium, which is the incremental return of a diversified portfolio (the market) over the risk-free rate (return of treasury bonds) required by an investor. It is needed for calculating the required return to equity (cost of equity). 2) Historical market risk premium, which is the historical differential return of the stock market over treasury bonds. 3) Expected market risk premium, which is the expected differential return of the stock market over treasury bonds. Many authors and finance practitioners assume that the expected market risk premium is equal to the historical market risk premium and to the required market risk premium. The CAPM assumes that the required market risk premium is equal to the expected market risk premium. However, the three concepts are different. The historical market risk premium is equal for all investors, but the required and the expected market risk premium are different for different investors. We also claim that there is no required market risk premium for the market as a whole: different investors use different required market risk premiums.
|Date of creation:||17 Oct 2004|
|Contact details of provider:|| Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN|
Web page: http://www.iese.edu/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Llubos Pástor, 2001.
"The Equity Premium and Structural Breaks,"
Journal of Finance,
American Finance Association, vol. 56(4), pages 1207-1239, 08.
- Lubos Pástor & Robert F. Stambaugh, "undated". "The Equity Premium and Structural Breaks," Rodney L. White Center for Financial Research Working Papers 21-98, Wharton School Rodney L. White Center for Financial Research.
- Lubos Pastor & Robert F. Stambaugh, "undated". "The Equity Premium and Structural Breaks," Rodney L. White Center for Financial Research Working Papers 11-00, Wharton School Rodney L. White Center for Financial Research.
- Luboš Pástor & Robert F. Stambaugh, 2000. "The Equity Premium and Structural Breaks," CRSP working papers 519, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Lubos Pastor & Robert F. Stambaugh, 2000. "The Equity Premium and Structural Breaks," NBER Working Papers 7778, National Bureau of Economic Research, Inc.
- 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.
- Scott Mayfield, E., 2004. "Estimating the market risk premium," Journal of Financial Economics, Elsevier, vol. 73(3), pages 465-496, September.
- Merton H. Miller, 2000. "The History Of Finance: An Eyewitness Account," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(2), pages 8-14.
- Haitao Li & Yuewu Xu, 2002. "Survival Bias and the Equity Premium Puzzle," Journal of Finance, American Finance Association, vol. 57(5), pages 1981-1995, October. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ebg:iesewp:d-0574. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Noelia Romero)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.