Survival Bias and the Equity Premium Puzzle

23 Pages Posted: 25 Feb 2002

See all articles by Yuewu Xu

Yuewu Xu

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF)

Haitao Li

University of Michigan - Stephen M. Ross School of Business; Cheung Kong Graduate School of Business; Cheung Kong Graduate School of Business

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Abstract

Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias. This relationship reveals the fundamental difficulty facing the survival argument: High survival bias requires an ex ante probability of market failure, which seems unrealistically high given the history of world financial markets.

Keywords: survival bias, equity premium

JEL Classification: C0, G0, G1

Suggested Citation

Xu, Yuewu and Li, Haitao, Survival Bias and the Equity Premium Puzzle. Available at SSRN: https://ssrn.com/abstract=301231 or http://dx.doi.org/10.2139/ssrn.301231

Yuewu Xu

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) ( email )

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New York, NY 10017-3206
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Haitao Li (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

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Cheung Kong Graduate School of Business ( email )

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China

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China