Abstract

http://ssrn.com/abstract=163285
 
 

Citations (15)



 


 



Can Survival Bias Explain the 'Equity Premium Puzzle'?


Yuewu Xu


Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF)

Haitao Li


University of Michigan - Stephen M. Ross School of Business; Cheung Kong Graduate School of Business; Cheung Kong Graduate School of Business

March 1999


Abstract:     
We show that the well-known model of market survival of Brown, Goetzmann and Ross (1995) fails to explain the "equity premium puzzle." The reasons are (1) the survival bias implied by the model is too small; (2) the model predicts rapidly declining of survival bias in the equity premium over the history of the survived market. We also demonstrate that other survival models are unlikely to succeed either, since to constantly generate high survival bias, the ex ante probability of long-term market survival has to be extremely small which contradicts the history of the world financial markets. Given that no theory in the existing literature predicts high survival bias in the U.S. equity premium, the current concerns for such bias are probably without grounds.

Number of Pages in PDF File: 33

JEL Classification: C4, C5, G1

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Date posted: May 15, 1999  

Suggested Citation

Xu, Yuewu and Li, Haitao, Can Survival Bias Explain the 'Equity Premium Puzzle'? (March 1999). Available at SSRN: http://ssrn.com/abstract=163285 or http://dx.doi.org/10.2139/ssrn.163285

Contact Information

Yuewu Xu
Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) ( email )
730 Third Avenue
New York, NY 10017-3206
United States
Haitao Li (Contact Author)
University of Michigan - Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-615-5475 (Phone)
Cheung Kong Graduate School of Business ( email ) ( email )
Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China
Cheung Kong Graduate School of Business ( email ) ( email )
Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China
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