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The Equity Risk Premium in 2013

John R. Graham

Duke University; NBER

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

January 28, 2013

We analyze the history of the equity risk premium from surveys of U.S. Chief Financial Officers (CFOs) conducted every quarter from June 2000 to December 2012. The risk premium is the expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond yield. While the risk premium sharply increased during the financial crisis peaking in February 2009, the premium has decreased to a level of 3.83% which is only slightly higher than the long-term average. However, the total market return forecast is at a historical low of 5.46%. The survey also provides measures of cross-sectional disagreement about the risk premium, skewness, and a measure of individual uncertainty. Consistent with the last four quarters of surveys, CFOs see more downside risks than upside risks. In addition, we find that dispersion of beliefs is above the long-term average as well as individual uncertainty. We also present evidence on the determinants of the long-run risk premium. Our analysis suggests the level of the risk premium closely tracks both market volatility (reflected in the VIX index) as well as credit spreads. However, the most recent data show a divergence between VIX and the risk premium.

Number of Pages in PDF File: 22

Keywords: Cost of capital, financial crisis, equity premium, long-term market returns, stock return forecasts, long-term equity returns, expected excess returns, disagreement, individual uncertainty, skewness, asymmetry, survey methods, risk and reward, TIPs, VIX, credit spreads

JEL Classification: G11, G31, G12, G14

working papers series

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Date posted: January 25, 2013 ; Last revised: June 13, 2013

Suggested Citation

Graham, John R. and Harvey, Campbell R., The Equity Risk Premium in 2013 (January 28, 2013). Available at SSRN: http://ssrn.com/abstract=2206538 or http://dx.doi.org/10.2139/ssrn.2206538

Contact Information

John Robert Graham
Duke University ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  29
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