References (26)


Citations (31)


Footnotes (33)



The Equity Risk Premium is Lower Than You Think It Is: Empirical Estimates From a New Approach

James J. Claus

GSA Capital

Jacob K. Thomas

Yale School of Management

May 1999

We offer ex ante estimates of the equity risk premium based on forecasted accounting numbers. Although our approach is isomorphic to dividend growth models, it generates various diagnostics that help to narrow the range of reasonable assumed growth rates. Our results, based on IBES consensus earnings forecasts over the 1985-1998 period, contrast sharply with those of prior research. Our estimates of risk premium are considerably lower than (about 3 percent) the estimates commonly cited (about 8 percent), and are also more stationary over time. This result has important implications both for academe (e.g., the equity premium puzzle) as well as practice (e.g., discount rates for valuation and over-valued stock markets).

Number of Pages in PDF File: 48

JEL Classification: M41, G12

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Date posted: June 6, 1999  

Suggested Citation

Claus, James J. and Thomas, Jacob K., The Equity Risk Premium is Lower Than You Think It Is: Empirical Estimates From a New Approach (May 1999). Available at SSRN: http://ssrn.com/abstract=165335 or http://dx.doi.org/10.2139/ssrn.165335

Contact Information

James Joshua Claus
GSA Capital ( email )
United Kingdom
Jacob Kandathil Thomas (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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References:  26
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