Abstract
The author argues that the equity premium or the historical spread between expected equity returns and government bond yields is probably far below the approximately 6% figure estimated in much of the finance literature. This, the author contends, is due both to an underestimate of the expected real return on the risk-free asset and an overestimate of the realized returns on equities. Correction of these biases reduces the equity premium to 1% to 2% per year. Furthermore, given the current high level of equity prices relative to earnings and high yield on government price-indexed bonds, it is extremely unlikely that the future premium will exceed the 1% to 2% range without an unprecedented increase in earnings growth.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
