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The Equity Premium and Structural Breaks

39 Pages Posted: 25 Jul 2000 Last revised: 14 Sep 2001

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Date Written: July 2000

Abstract

A long return history is useful in estimating the current equity premium even if the historical distribution has experienced structural breaks. The long series helps not only if the timing of breaks is uncertain but also if one believes that large shifts in the premium are unlikely or that the premium is associated, in part, with volatility. Our framework incorporates these features along with a belief that prices are likely to move opposite to contemporaneous shifts in the premium. The estimated premium since 1834 fluctuates between four and six percent and exhibits its sharpest drop in the last decade.

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F., The Equity Premium and Structural Breaks (July 2000). NBER Working Paper No. w7778. Available at SSRN: https://ssrn.com/abstract=235495

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
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United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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