Measuring Equity Premium Using Earnings Forecasts: An International Analysis

39 Pages Posted: 13 Aug 1999

Date Written: June 1999


The returns earned by US stocks since 1926 have generated an "equity premium puzzle", since they exceed estimates derived from theory, from other periods and markets, and from surveys of investors. To determine if this historic estimate is biased upward, we offer a new approach based on accounting data and analysts' earnings forecasts, which is used to examine six different equity markets: Canada, France, Germany, Japan, UK, and US. For each year between 1985 and 1998, our equity premium estimate is the difference between the implied discount rate (that equates current prices with the present value of future flows) and the prevailing 10-year risk-free rate. These ex ante estimates, which are around three percent or less in the six markets examined, support the view that the historic estimate is too high. Although the accounting flows are isomorphic to dividends, our approach makes better use of information available currently and generates diagnostics that help to narrow the range of reasonable growth rate assumptions.

JEL Classification: G12, G14, G15, M41

Suggested Citation

Claus, James Joshua and Thomas, Jacob Kandathil, Measuring Equity Premium Using Earnings Forecasts: An International Analysis (June 1999). Available at SSRN: or

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

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