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    Rights statement: This is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, 52, 2017 DOI: 10.1016/j.irfa.2017.04.011

    Accepted author manuscript, 510 KB, PDF document

    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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Equity premium estimates from economic fundamentals under structural breaks

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Published
<mark>Journal publication date</mark>07/2017
<mark>Journal</mark>International Review of Financial Analysis
Volume52
Number of pages13
Pages (from-to)49-61
Publication StatusPublished
Early online date1/05/17
<mark>Original language</mark>English

Abstract

Abstract This article compares three estimates of the conditional equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. The premia are estimated using a theory-informed Bayesian model that admits structural breaks. The equity premium fell from 8.16% in 1951 to 1.15% in 1985. Approximately half of this decline was reversion of a high conditional premium to the long run mean and the remainder resulted from a decline in the expected stock return. The decline in the expected stock return was largely driven by the Fed Accord (1951) and the Fed’s ‘monetarist policy experiment’ (1979–1982).

Bibliographic note

This is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, 52, 2017 DOI: 10.1016/j.irfa.2017.04.011