Tax-adjusted market risk premiums in New Zealand: 1931–2002

Abstract

This paper documents historical returns to equities and long-term government bonds, bond yields and inflation rates in New Zealand over the period 1931–2002. Personal tax rates on various types of investment income are also estimated. This data is used to estimate the market risk premiums in two forms of the capital asset pricing model (CAPM). In particular, the market risk premium in the standard CAPM is estimated using the Ibbotson [Ibbotson Associates, 2000. Stocks, bonds, bills and inflation: 2000 year book] methodology, yielding an estimate of 0.058 relative to long-term government bond returns and 0.055 relative to bond yields. In addition, in respect of the tax-adjusted version of the CAPM [Cliffe and Marsden, Pac. Account. Rev. 4 (1992) 1; Lally, Pac. Account. Rev. 4 (1992) 31] that is now widely used in New Zealand, the market risk premium is estimated using parallel methodology, yielding estimates of 0.074 relative to bond returns and 0.072 relative to bond yields.