Equities Market Level

49 Pages Posted: 26 Jul 2012

Date Written: July 25, 2012


Equities have exhibited high returns relative to bonds and cash (bills) historically. The equity risk premium is a reward for bearing losses during bad times, where the risks of bad times are defined by low consumption growth, disasters, or long-run risks. Other investor characteristics including income and beliefs may also affect the equity risk premium. Equities have historically been a surprisingly poor hedge against inflation. While theory suggests that equity risk premiums are predictable, theory also suggests that the predictability is hard to detect statistically and this is verified empirically. Equity volatility, on the other hand, is much more predictable than equity risk premiums.

Keywords: Equity premium, GARCH, Predictability, Habit, Long-run risk, Disasters, Heterogeneous agents, Spurious regression

JEL Classification: C13, C22, D51, E21, G12

Suggested Citation

Ang, Andrew, Equities Market Level (July 25, 2012). Available at SSRN: https://ssrn.com/abstract=2117625 or http://dx.doi.org/10.2139/ssrn.2117625

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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