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The Worldwide Equity Premium: A Smaller Puzzle
Elroy Dimson London Business School Paul Marsh London Business School - Institute of Finance and Accounting Mike Staunton London Business School - Institute of Finance and Accounting April 7, 2006 EFA 2006 Zurich Meetings Paper AFA 2008 New Orleans Meetings Paper Abstract: We use a new database of long-run stock, bond, bill, inflation, and currency returns to estimate the equity risk premium for 17 countries and a world index over a 106-year interval. Taking U.S. Treasury bills (government bonds) as the risk-free asset, the annualised equity premium for the world index was 4.7% (4.0%). We report the historical equity premium for each market in local currency and US dollars, and decompose the premium into dividend growth, multiple expansion, the dividend yield, and changes in the real exchange rate. We infer that investors expect a premium on the world index of around 3-3 1/2% on a geometric mean basis, or approximately 4 1/2-5% on an arithmetic basis.
Keywords: Equity risk premium, long run returns, survivor bias, financial history, stocks bonds bills inflation JEL Classifications: G12, G15, G23, G31, N20 Working Paper SeriesDate posted: March 17, 2006 ; Last revised: March 22, 2007Suggested CitationContact Information
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