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The Equity Premium Puzzle and the Ex Post Bias

Author

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  • Jakob B. Madsen

    (Institute of Economics, University of Copenhagen)

Abstract

This paper argues that the high historical excess returns to equity are1 a result of a severe ex post bias over the period from 1915 to circa 1960 because inflation surprises during this period drove a wedge between ex ante and ex post returns to bonds. Furthermore, it is shown that ex ante and ex post returns to shares are identical in steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.5-3.9% over the past 130 years.

Suggested Citation

  • 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.
  • Handle: RePEc:kud:kuiefr:200401
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    File URL: http://www.econ.ku.dk/FRU/WorkingPapers/PDF/2004/2004_01.pdf
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    Cited by:

    1. Rieger, Marc Oliver & Wang, Mei, 2012. "Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data," Finance Research Letters, Elsevier, vol. 9(2), pages 63-72.
    2. van Ewijk, Casper & de Groot, Henri L.F. & Santing, A.J. (Coos), 2012. "A meta-analysis of the equity premium," Journal of Empirical Finance, Elsevier, pages 819-830.
    3. Marc Oliver Rieger & Thorsten Hens & Mei Wang, 2013. "International Evidence on the Equity Premium Puzzle and Time Discounting," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 149-163, September.
    4. Philip Jagd & Jakob Madsen, 2009. "Myopic loss aversion, bond returns and the equity premium puzzle," Applied Financial Economics, Taylor & Francis Journals, pages 1383-1390.

    More about this item

    Keywords

    equity premium; inflation expectations; expected returns;

    JEL classification:

    • G0 - Financial Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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