Global Evidence on the Equity Risk Premium

Abstract

Most long-run empirical research on the historical risk premium has focused on the experience of the United States. However, the United States has been a remarkably successful economy, making it unlikely that the US risk premium is representative. Until recently, evidence on the risk premium in most other countries has typically been measured over only relatively brief intervals during the latter part of the twentieth century. We extend the evidence by examining equity, bond, and bill returns in 16 different countries over the 103-year period from 1900 to 2002. We show that the equity risk premium has typically been lower than most previous research has indicated. Finally, we argue that even this lower figure for the historical risk premium is still an overestimate of the likely future risk premium.

Keywords: Equity risk premium, Long-term returns, Financial history, Survivorship, Required rate of return

JEL Classification: F30, G10, G12, G15, G31, N20