The Equity Premium: Consistent with GDP Growth and Portfolio Insurance

18 Pages Posted: 20 Nov 2006

See all articles by Christophe Faugère

Christophe Faugère

Kedge Business School Bordeaux

Julian Van Erlach

Nexxus Wealth Technologies, Inc.

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Abstract

We find that the long-term equity premium is consistent with both GDP growth and portfolio insurance. We use a supply-side growth model and demonstrate that the arithmetic average stock market return and the returns on corporate assets and debt depend on GDP per capita growth. The implied equity premium matches the U.S. historical average over 1926-2001. Separately, we find that the equity premium tracks the value of a put option on the S&P 500. Our theory predicts a smaller equity premium in the future, assuming that the recent regime shifts in dividend policies, interest rates, and tax rates are permanent.

Suggested Citation

Faugère, Christophe and Van Erlach, Julian, The Equity Premium: Consistent with GDP Growth and Portfolio Insurance. The Financial Review, Vol. 41, No. 4, pp. 547-564, November 2006, Available at SSRN: https://ssrn.com/abstract=945523 or http://dx.doi.org/10.1111/j.1540-6288.2006.00156.x

Christophe Faugère (Contact Author)

Kedge Business School Bordeaux ( email )

680 Cours de la Liberation
Bordeaux, Aquitaine 33405
France

Julian Van Erlach

Nexxus Wealth Technologies, Inc. ( email )

1508 Nelson Dr.
Irving, TX 75038
United States
651-558-6242 (Phone)

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