Download this Paper Open PDF in Browser

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

48 Pages Posted: 6 Jun 1999  

James J. Claus

GSA Capital

Jacob K. Thomas

Yale School of Management

Date Written: May 1999

Abstract

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).

JEL Classification: M41, G12

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: https://ssrn.com/abstract=165335 or http://dx.doi.org/10.2139/ssrn.165335

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

Paper statistics

Downloads
2,525
Rank
3,817
Abstract Views
6,022