The Equity Risk Premium in 2010

21 Pages Posted: 6 Aug 2010 Last revised: 10 Aug 2010

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: August 9, 2010

Abstract

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 June 2010. 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 current surveys show that the premium has returned to levels observed in late 2006 and early 2007. The survey also provides measures of cross-sectional disagreement about the risk premium, skewness, and a measure of individual uncertainty. While disagreement has decreased from peak levels, the level of disagreement is still historically high suggesting considerable 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.

Keywords: Cost of capital, financial crisis, equity premium, long-term market returns, 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

Suggested Citation

Graham, John R. and Harvey, Campbell R., The Equity Risk Premium in 2010 (August 9, 2010). Available at SSRN: https://ssrn.com/abstract=1654026 or http://dx.doi.org/10.2139/ssrn.1654026

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

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

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Paper statistics

Downloads
1,623
Rank
7,823
Abstract Views
6,208