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The Equity Premium and Structural Breaks

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  • Lubos Pastor
  • Robert F. Stambaugh

Abstract

A long return history is useful in estimating the current equity premium even if the historical distribution has experienced structural breaks. The long series helps not only if the timing of breaks is uncertain but also if one believes that large shifts in the premium are unlikely or that the premium is associated, in part, with volatility. Our framework incorporates these features along with a belief that prices are likely to move opposite to contemporaneous shifts in the premium. The estimated premium since 1834 fluctuates between four and six percent and exhibits its sharpest drop in the last decade.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7778.

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Date of creation: Jul 2000
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Publication status: published as Pastor, Lubos and Robert F. Stambaugh. "The Equity Premium And Structural Breaks," Journal of Finance, 2001, v56(4,Aug), 1207-1239.
Handle: RePEc:nbr:nberwo:7778
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  • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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