The Equity Premium

Bostock, Paul

doi:10.3905/jpm.2004.319936

Cited by 11 publications

(11 citation statements)

References 22 publications

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“…• EEP is smaller than HEP according to Copeland et al (2000, HEP-1.5 to 2%); Goedhart et al (2005, HEP-1 to 2%); Bodie, Kane and Marcus (1996, HEP-1%); Mayfield (2004, HEP-2.4%); Booth (1999, 1 Or the extra return that the overall stock market must provide over the Government Bonds to compensate for the extra risk. 2 We agree with Bostock (2004) when he says that "understanding the equity premium is largely a matter of using clear terms". 3 Provided they use the same time frame, the same market index, the same risk-free instrument and the same average (arithmetic or geometric).…”

Section: Introductionmentioning

confidence: 85%

“…Arnott and Bernstein (2002) also conclude that "the current risk premium is approximately zero". Bostock (2004) concludes that according to historical average data, equities should offer a risk premium over government bonds between 0.6% and 1.8%. Grabowski (2006) concludes that "after considering the evidence, any reasonable long-term estimate of the normal EEP as of 2006 should be in the range of 3.5% to 6%".…”

Section: Other Estimates Of the Expected Equity Premiummentioning

confidence: 99%

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Equity Premium: Historical, Expected, Required and Implied

Fernández

2007

SSRN Journal

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The equity premium designates four different concepts: Historical Equity Premium (HEP); Expected Equity Premium (EEP); Required Equity Premium (REP); and Implied Equity Premium (IEP). We highlight the confusing message in the literature regarding the equity premium and its evolution. The confusion arises from not distinguishing among the four concepts and from not recognizing that although the HEP is equal for all investors, the REP, the EEP and the IEP differ for different investors. A unique IEP requires assuming homogeneous expectations for the expected growth (g), but we show that there are several pairs (IEP, g) that satisfy current prices. We claim that different investors have different REPs and that it is impossible to determine the REP for the market as a whole, because it does not exist. We also investigate the relationship between (IEP-g) and the risk free rate. There is a kind of schizophrenic approach to valuation: while all authors admit different expectations of equity cash flows, most authors look for a unique discount rate. It seems as if the expectations of equity cash flows are formed in a democratic regime, while the discount rate is determined in a dictatorship.

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Section: Introductionmentioning

confidence: 85%

Section: Other Estimates Of the Expected Equity Premiummentioning

confidence: 99%

Equity Premium: Historical, Expected, Required and Implied

Fernández

2007

SSRN Journal

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“…Instead of trying to find out theoretical vindications for the puzzle some authors resorted to different agendas, like that of providing evidence that the expected, or normal, or theoretical, equity premium is less than the actual premium. See, for example, Arnott and Bernstein (2002), Fama andFrench, (2002), andBostock (2004). However, by surveying the profession, Welch (2000) finds that financial economists estimate the just equity premium to be close to the actual one.…”

Section: Theorymentioning

confidence: 99%

The Precision of Unconditional Estimators of the Equity Premium

Azar

2015

AFR

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This paper has the purpose of providing unconditional estimators of the equity premium. In plain words the estimators are obtained by the constants in regressions of the equity premium on a constant. More than one specification is tried and more than one type of standard errors is implemented. The specifications include ordinary least squares, EGARCH, robust least squares, quantile regressions, and Markov switching regressions with two regimes. The analysis is repeated by adding in categorical variables that correspond to outliers. Theoretically these estimators of the equity premium are unbiased and consistent. All models are subjected to serial correlation tests on the residuals. These tests support the absence of serial correlation. This is conducive to the conclusion that the models are well specified and that the estimators are not only unbiased and consistent but also efficient. The paper gives point estimates and 95% confidence intervals of the equity premium, develops hypothesis tests, and reports point estimates of the standard errors. The results may help in assessing the magnitude of the equity premium and the precision with which this premium is measured. Keywords: Equity premium, Unconditional estimators, Robust standard errors, EGARCH, Ordinary least squares, Robust least squares, Quantile regressions, Markov switching regressions, Categorical outlier variables 1. Introduction The size of the equity risk premium has been the subject of intense investigation. Based on this research it is inferred that the equity premium is surely much larger than the short term T-bill rate. What is lacking in the literature is the extent of precision in estimating the equity premium. Rare are the studies that provide a standard error for the estimated equity premium. Dimson et al. (2008) are an exception. Other academicians, like Fama and French (2002) and Goetzmann and Ibbotson (2006), report point estimates and standard deviations from which it is difficult to derive standard errors. This paper finds that these standard errors are relatively large. Thus the major purpose of this paper is to offer as many precision estimates as possible by varying the model that is specified, while keeping these models simple. Two unbiased estimators of the equity premium are the unconditional mean and the unconditional median. The latter estimator is a natural input in quantile regressions. The first unconditional estimator can be obtained easily from a regression of the premium on a constant, and the precision of estimation is the precision with which this constant is estimated. More than one variant of this basic model is attempted. There is more disparity than commonness in the results. Especially crucial is whether or not the standard errors need to be adjusted for serial correlation and heteroscedasticity. Robust standard errors tend to produce larger standard errors, and consequently less precision. In addition each variant specification provides for a point estimate of the equity premium that is generally different ...

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“…They concluded that "the rumours of the predictability of the equity premium are greatly exaggerated". Bostock (2004) developed a framework for constructing an equity risk premium as a combination of required premiums for duration of equities, issuer risk, discretionary income, trading costs, and tax risk. According to his estimates total premium over government bonds should be 1.7%±0.6%.…”

Section: 2 2 D I V I D E N D S a N D E A R N I N G Smentioning

confidence: 99%

“…It is possible, for example, that an environment with both a low level and a low volatility of inflation affects the relative riskiness of stocks and bonds, and hence the risk premium. Bostock (2004) suggests that there is a high correlation over history between the equity risk premium and unanticipated inflation. Campbell and Vuolteenaho (2004) find that the level of inflation explains almost 80% of the time-series variation in stock market mispricing.…”

Section: 3 1 L O W I N F L a T I O N E N V I R O N M E N Tmentioning

confidence: 99%