The Equity Risk Premium in 2013
22 Pages Posted: 25 Jan 2013 Last revised: 30 Jan 2013
Date Written: January 28, 2013
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 December 2012. 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 premium has decreased to a level of 3.83% which is only slightly higher than the long-term average. However, the total market return forecast is at a historical low of 5.46%. The survey also provides measures of cross-sectional disagreement about the risk premium, skewness, and a measure of individual uncertainty. Consistent with the last four quarters of surveys, CFOs see more downside risks than upside risks. In addition, we find that dispersion of beliefs is above the long-term average as well as individual 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. However, the most recent data show a divergence between VIX and the risk premium.
Keywords: Cost of capital, financial crisis, equity premium, long-term market returns, stock return forecasts, 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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Equity Premium Consensus Forecast Revisited
By Ivo Welch
-
The Worldwide Equity Premium: A Smaller Puzzle
By Elroy Dimson, Paul Marsh, ...
-
The Market Risk Premium: Expectational Estimates Using Analysts' Forecasts
-
The Equity Risk Premium in 2008: Evidence from the Global CFO Outlook Survey
By John R. Graham and Campbell R. Harvey
-
Equity Risk Premiums (ERP): Determinants, Estimation and Implications
-
The Equity Risk Premium in January 2007: Evidence from the Global Cfo Outlook Survey
By John R. Graham and Campbell R. Harvey
-
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2011 Edition
-
The Equity Risk Premium in January 2006: Evidence from the Global Cfo Outlook Survey
By John R. Graham and Campbell R. Harvey
-
Equity Risk Premiums (ERP): Determinants, Estimation and Implications - The 2010 Edition
-
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2012 Edition