14 Pages Posted: 17 Jan 2008 Last revised: 22 Jul 2009
Date Written: January 18, 2008
A sample of about 400 finance professors estimates the 1-year equity premium and the 30-year geometric equity premium to be about 5%, as of year-end 2007. The sample interquartile range is 4% to 6%. The typical range recommended in their classes is a little higher (from 4% to 7%, with a mean of 6%). Since 2001, participants have become more bearish (by about 0.5%).
The participants estimate the 30-year arithmetic equity premium estimate to be about 75 basis points higher than its geometric equivalent; and they estimate the 30-year geometric expected rate of return on the stock market to be about 9%.
75% of finance professors recommend using the CAPM for corporate capital budgeting purposes; 10% recommend the Fama-French model; 5% recommend an APT model.
Keywords: equity premium
JEL Classification: G1
Suggested Citation: Suggested Citation
Welch, Ivo, The Consensus Estimate for the Equity Premium by Academic Financial Economists in December 2007 (January 18, 2008). Available at SSRN: https://ssrn.com/abstract=1084918 or http://dx.doi.org/10.2139/ssrn.1084918
By Ivo Welch