Abstract
The predictability of the equity risk premium is a central and controversial issue in finance. The risk premium factor model is a recent and novel approach to forecastingtheequityriskpremiumandthelevelandpriceearningsratiooftheequity market.Thispaperaimstoovercomethemainlimitationof,andthereforeimprove upon,thisnovelapproach.Theenhancedriskpremiumfactormodelproposedhere to forecast the market return is clearly supported by the evidence. Furthermore, a model that articulates the same variables considered in the framework proposed, but that imposes no specific functional form to relate them, produces very highly correlated and unbiased forecasts of the market return.
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