Research Roundtable Discussion: The Market Risk Premium
10 Pages Posted: 27 Jun 2000
Date Written: June 30, 2000
Discussants: PETER BOSSAERTS, California Institute of Technology JOHN COCHRANE, University of Chicago, Graduate School of Business EUGENE FAMA, University of Chicago, Graduate School of Business WILL GOETZMANN, Yale University, School of Management ROBERT S. HARRIS, Darden Graduate School of Business, University of Virginia JOHN HEATON, Northwestern University, Kellogg Graduate School of Management ROGER IBBOTSON, Yale University, School of Management MICHAEL J. MAUBOUSSIN, Chief U.S. Investment Strategist - Credit Suisse First Boston and Adjunct Professor - Finance and Economics - Columbia Business School ANDRE F. PEROLD, Harvard University, Harvard Business School JAY RITTER, University of Florida, Warrington College of Business ROBERT WHITELAW, New York University, Stern School of Business
Organized by: PETER TUFANO, Harvard Business School
While it is sometimes difficult to teach ideas that we would all agree to be correct, it is infinitely more difficult--and more rewarding--to teach material where the "correct answer" is still very debatable. For these subjects, one challenge as an educator is to know the "state of play" in the academic community about the issue. Another challenge is deciding whether to take one point of view, or whether to try to teach the students more than one point of view. While students will press for THE right answer, if they can understand why reasonable people reach different answers, this can move a class from fixating on one rote answer to a deeper contemplation of the subtleties of the various arguments.
This new section of FEN-Educator will attempt to spotlight research areas where there is considerable disagreement in the profession. Our inaugural piece is a discussion of the equity risk premium--the long run return of stocks over riskless bonds--which is the source of much confusion in MBA classrooms and in practice. Ivo Welch has agreed to write a brief summary of the issues surrounding the market risk premium and to assemble a selected bibliography on the topic. We then invited a range of researchers, educators and practitioners to comment on how they treat this topic in the classroom. We would like to thank Ivo and the discussants for their willingness to innovate. In the spirit of innovation, we have set up a discussion board where readers can post their own observations on teaching the market risk premium and continue the conversation begun by Ivo and the discussants. (((This board can be found at http://www.???)))
This section was obviously not intended to be the definitive answer on the market risk premium, nor a large scale survey of the numbers we use in class (which can be found in Ivo's forthcoming Journal of Business piece.) Rather it is a modest attempt to move discussions from the halls of our offices (where we ask one another, "What are you going to tell them tomorrow about the risk premium?") to a more public venue, and in so doing, assist finance professors. Please let us know what you think of this concept, how it can be improved, and what other topics you might find interesting.
JEL Classification: G10
Suggested Citation: Suggested Citation