41 Pages Posted: 17 Mar 2006 Last revised: 20 Mar 2016
Date Written: April 7, 2006
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.
Keywords: Equity risk premium, long run returns, survivor bias, financial history, stocks bonds bills inflation
JEL Classification: G12, G15, G23, G31, N20
Suggested Citation: Suggested Citation
Dimson, Elroy and Marsh, Paul and Staunton, Mike, The Worldwide Equity Premium: A Smaller Puzzle (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. Available at SSRN: https://ssrn.com/abstract=891620 or http://dx.doi.org/10.2139/ssrn.891620
By Ivo Welch