Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach

Abstract

Is the US equity performance an exception rather than the norm? With data on stock market returns from a cross-section of 55 countries in the past century, we find that the US equity return is subject to little survivorship bias. A global CAPM fits surprisingly well in the cross-section of countries. Nonetheless, the US stock market does appear exceptional in terms of geometric returns rather than arithmetic returns. We model the subjective crash belief of an investor who infers the crash risk in the US by cross learning from other countries. The investor distinguishes between idiosyncratic and systematic crash risk and identifies a structural break in the magnitude of the systematic risk at the turn of the century. The crash belief in the US shows a persistent and widening divergence from the implied global average. The secular decline in the US crash risk implies that a part of the measured equity premium is due to surprises from updating positively on future price-dividend ratios rather than compensation for risk.