The global equity premium revisited: What human rights imply for assets' purchasing power

Abstract

In this paper, we argue that past computations of the equity risk premium did not properly account for the financial implications of political collapse on property, civil and human rights. Accordingly, we argue past calculations overstated the equity risk premium. In their stead, we argue a conservative lower bound is to set the value of equity to zero when confronted with the total absence of human, civil and property rights which negate the purchasing power of financial investments. In doing so, we provide a valid lower-bound estimate of the equity risk premium that is corrected for lack of such basic rights, demonstrating the important changes in this estimate over time.