A Comparison of Annual Common Stock Returns: 1871-1925 with 1926-85

Mean Reversion in Equilibrium Asset Prices

“…From (5) and (7), equilibrium gross returns are computed as, Hamilton (1987) for details on estimation or Lam (1988) Wilson and Jones (1987), and from Ibbotson and Sinquefield (1982) difficult to obtain a good estimate of p using annual observations.9…”

Long-Term Returns and Risk for Bonds

“…We have used these alternative data for the period 1914-1981, splicing t h s period to the CPI data in Wilson and Jones [1987] for the period 1857-1913. Overall, these unique series provide an independent source from which nominal and inflation-adjusted returns can be calculated for comparison with alternative estimates available for specified time periods. Nominal yields and inflation-adjusted yields are reported on an annual basis for both government and corporate bonds in appendur Exhibit A-1, and nominal and real returns are reported in appendut Exhibit A-2.…”

“…There are also gaps in bond data when compared to common stocks, for which we have reconstructed the S&P 500 index back to 1871 (Wilson and Jones [1987]); Schwert [1990] has extended market data even farther back. Meanwhde, the experience of bondholders over the years provides strong evidence that bonds are a risky asset for whch reliable, long-term information is needed.…”

Commentary

“…This result is important in its own right because it expands the existing literature on historical securities-market performance. We already know, for example, that American stocks were priced efficiently by the 1870s (Wilson and Jones 1987;Snowden 1987) and that they displayed "modern" patterns of returns and volatility as far back as 1802 (Schwert 1990). So the four results that Sylla (1998) cites appear to extend the "early security market efficiency thesis" even further back in time.…”