The Expected Return on Risky Assets: International Long-run Evidence

Abstract

This paper studies trends in the expected return on equity and housing and its relationship with the safe rate. Across 17 advanced economies, the expected risky return has been in steady long-run decline, but its trend is markedly different from that in the safe rate. As a consequence, the ex ante risk premium exhibits large secular movements, and risk premia and safe rates are strongly negatively correlated. We provide evidence linking these differential risky and safe rate trends to secular variation in macroeconomic risk.

Keywords: expected returns, risk premia, real interest rates, return predictability, long-run trends

JEL Classification: G12, G15, E43, E44, N20