A Re-Examination of the Historical Equity Risk Premium in Australia

28 Pages Posted: 23 Apr 2007

See all articles by Tim Brailsford

Tim Brailsford

Bond University

John C. Handley

University of Melbourne - Department of Finance

Krishnan Maheswaran

University of Melbourne - Department of Finance

Date Written: April 2007

Abstract

In light of the ongoing debate over the value of the equity risk premium, its increasing use in the regulatory setting, and the impact of dividend imputation on the premium, this paper presents a timely new look at the historical equity risk premium in Australia, and provides an improved understanding of the historical record. We document concerns about data quality which become increasingly important the further back in time one looks. In particular, there are sufficient question marks over the quality of data prior to 1958 to warrant any estimates based thereon to be treated with caution. Accordingly, we present a new set of estimates of the historical equity risk premium corresponding to periods of increasing data quality but of decreasing sample size. Relative to bonds (bills), the equity premium has averaged 6.3% (6.8%) pa over 1958-2005, which is a period of relatively good data quality. Together with other results in the paper, the findings reveal a historical estimate that is substantially less than widely cited historical studies would otherwise indicate. We reconcile prior evidence through documenting a dividend adjustment that has typically been overlooked. We also provide estimates that incorporate an adjustment for imputation credits.

Keywords: Cost of Capital, Equity Risk Premium, CAPM, Valuation

JEL Classification: G100, G110, G310

Suggested Citation

Brailsford, Timothy John and Handley, John C. and Maheswaran, Krishnan, A Re-Examination of the Historical Equity Risk Premium in Australia (April 2007). Available at SSRN: https://ssrn.com/abstract=982043 or http://dx.doi.org/10.2139/ssrn.982043

Timothy John Brailsford

Bond University ( email )

Gold Coast, QLD 4229
Australia

HOME PAGE: http://www.bond.edu.au

John C. Handley (Contact Author)

University of Melbourne - Department of Finance ( email )

Victoria
Parkville, Victoria 3010 3010
Australia
(61) 3 8344 7663 (Phone)
(61) 3 8344 6914 (Fax)

Krishnan Maheswaran

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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