The Equity Risk Premium in January 2007: Evidence from the Global CFO Outlook Survey

20 Pages Posted: 28 Jan 2007  

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Date Written: January 25, 2007

Abstract

We analyze the results of the most recent survey of U.S. Chief Financial Officers (CFOs) which looks ahead to the first quarter of 2007 and beyond. We present expectations of the equity risk premium measured over a 10-year horizon relative to a 10-year U.S. Treasury bond. This multi-year survey has been conducted every quarter from June 2000 to November 2006. Each quarter the survey also provides measures of cross-sectional disagreement about the risk premium, skewness, and a measure of individual uncertainty. The individual uncertainty is deduced from the 80% confidence interval that each respondent provides for his or her risk premium assessment. We also present evidence on the determinants of the long-run risk premium. Our analysis suggests there is a positive correlation between the ex ante risk premium and real interest rates as reflected in Treasury Inflation Indexed Notes. The level of the risk premium also appears to track market volatility as reflected in the VIX index.

Keywords: Cost of capital, equity premium, long-term market returns, long-term equity returns, expected excess returns, disagreement, individual uncertainty, skewness, asymmetry, survey methods, risk and reward, TIPs, VIX

JEL Classification: G11, G31, G12, G14

Suggested Citation

Graham, John R. and Harvey, Campbell R., The Equity Risk Premium in January 2007: Evidence from the Global CFO Outlook Survey (January 25, 2007). Available at SSRN: https://ssrn.com/abstract=959703 or http://dx.doi.org/10.2139/ssrn.959703

John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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