Abstract
Though the profound importance of the market risk p remium to finance is unquestioned, its actual measurement has been problematic for both academics and analysts alike. What exactly is the magnitude of the ex post market risk premium? What is its relationship with the expected or ex ante premium? Though finance theory estimates an hi storical equity premium of 1-2%, simple arithmetic averaging of historical data gives a gre ater mean of 5-6%, an anomaly known as the equity premium puzzle. More recent findings provide a still greater equity premium point estimate. This paper shows that statistical misspecification of historical equity premium data may be an important contributing factor for such contradictio ns.
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