Luck and the US Equity Premium

23 Pages Posted: 19 Jan 2009 Last revised: 8 Mar 2009

See all articles by Matthew C. Pollard

Matthew C. Pollard

London Business School; Australian National University (ANU)

Date Written: March 2, 2009


The equity premium puzzle in US stocks is resolved by a simple model for luck across countries. The observed premium of the US and other successful countries are positively biased since they are implicitly conditioned on being the largest observations over a period of history. After correcting this bias effect ("winner bias"), the observed US equity premium is consistent with an ex-ante premium of zero. A simple model is used where the return on every global market has equal mean and variance, and equal ex-ante equity premium of zero. It is tested against long-term equity returns for 39 countries over 50 years. The model correctly predicts the winning country's ex-post premia and Sharpe ratio with US values; the distribution of all countries ex-post premia and the distribution of market capitalizations. This suggests the US premium is significantly lower than long-term historical estimates and luck is a sufficient explanation for long-term differences in countries equity markets.

Keywords: Selection Bias, Equity premium, order statistics

JEL Classification: G10, G12, G15

Suggested Citation

Pollard, Matthew C., Luck and the US Equity Premium (March 2, 2009). Available at SSRN: or

Matthew C. Pollard (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601

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