The Equity Risk Premium and the Required Share Returns in a Tobin’s q Model
Based on the Tobin’s q principle this paper shows that earnings per unit of capital and the output capital ratio are excellent measures of the required share returns because they are only temporarily affected by earnings shocks but are driven permanently by changes in required share returns. Evidence for the US over the period from 1889 to 2002 suggests that real required share returns and the equity risk premium climbed to extraordinarily high levels from the late 1930, to the end of the 1940s, and have since declined. The risk premium is currently somewhere between 4 and 6%.
|Date of creation:||Sep 2003|
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- Ellen R. McGrattan & Edward C. Prescott, 2003.
"Average debt and equity returns: puzzling?,"
313, Federal Reserve Bank of Minneapolis.
- Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2000.
"The declining U.S. equity premium,"
Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
- Robert B. Barsky & J. Bradford De Long, "undated".
"Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard,"
J. Bradford De Long's Working Papers
_121, University of California at Berkeley, Economics Department.
- Robert B. Barsky & J. Bradford De Long, 1991. "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 815-836.
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