The Market Risk Premium: Expectational Estimates Using Analysts' Forecasts

Abstract

We use expectational date from financial analysts to estimate a market risk premium for U.S. stocks. Using the SP500 as a proxy for the market portfolio, we find an average market risk premium of 7.14% above yields on long-term U.S. government bonds over the period of 1982-1998. We also find that risk premium varies over time and that much of this variation can be explained by either the level of interest rates or readily available forward-looking proxies for risk. The market risk premium appears to move inversely with government interest rates suggesting that required returns on stocks are more stable than interest rates themselves.