Survival Bias and the Equity Premium Puzzle
23 Pages Posted: 25 Feb 2002
There are 2 versions of this paper
Survival Bias and the Equity Premium Puzzle
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: Suggested Citation
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