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The Worldwide Equity Premium: A Smaller PuzzleElroy DimsonUniversity of Cambridge - Judge Business School ; London Business School Paul MarshLondon Business School - Institute of Finance and Accounting Mike StauntonLondon Business School - Institute of Finance and Accounting April 7, 2006 Chapter 11 of R Mehra (Ed), Handbook of the Equity Risk Premium. Elsevier, 2008, pages 467–514 AFA 2008 New Orleans Meetings Paper; EFA 2006 Zurich Meetings Paper Abstract: We use a new database of long-run stock, bond, bill, inflation, and currency returns to estimate the equity risk premium for 17 countries and a world index over a 106-year interval. Taking U.S. Treasury bills (government bonds) as the risk-free asset, the annualised equity premium for the world index was 4.7% (4.0%). We report the historical equity premium for each market in local currency and US dollars, and decompose the premium into dividend growth, multiple expansion, the dividend yield, and changes in the real exchange rate. We infer that investors expect a premium on the world index of around 3-3 1/2% on a geometric mean basis, or approximately 4 1/2-5% on an arithmetic basis.
Number of Pages in PDF File: 41 Keywords: Equity risk premium, long run returns, survivor bias, financial history, stocks bonds bills inflation JEL Classification: G12, G15, G23, G31, N20 Date posted: March 17, 2006 ; Last revised: March 20, 2016Suggested CitationContact Information
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