[...]... an increase of more than 125 percent Since 1933 marked the end of the period when the U.S was on the gold standard, this break can be seen as the change in the equity premium after the implementation of the new policy 1.4 Variation in the Equity Premium Over Time The equity premium has varied considerably over time, as illustrated in Figures 2 and 3 Furthermore, the variation depends on the time horizon... Rates of Return 4.1 Extremes of History 4.2 The Long-Run Perspective 469 471 472 474 475 477 479 480 483 xiv Contents 5 New Global Evidence on the Equity Premium 5.1 The Equity Premium Around the World 5.2 A Smaller Risk Premium 5.3 Survivorship of Markets 5.4 Survivorship Bias Is Negligible 6 Decomposing the Historical Equity Premium 6.1 Unanticipated Success 6.2 Decomposition of the Equity Premium. .. Flow Risk, Discounting Risk, and the Equity Premium Puzzle 377 Gurdip Bakshi (Maryland) and Zhiwu Chen (Yale) 1 Introduction 2 Economic Determinants of Equity Premium 2.1 Cash Flow Process 2.2 The Discounting Process 2.3 Dynamics of the Market Portfolio 2.4 Dynamics of the Equity Premium 3 Time-Series Data on S&P500 EPS, EPS Growth, and the Interest Rate 4 Implications of the Model for Equity Premium. .. constant The low premium in the 19th century is largely due to the fact that the equity premium for the period 1802–1861 was zero.22 If we exclude this period, we find that difference in the premium in the second half of the 19th century relative to average values in the 20th century is less striking We see a dramatic change in the equity premium in the post-1933 period the premium rose from 3.62 percent... resolve the Equity Premium Puzzle I designed this volume to be a collection of essays by experts in the field, discussing their own work and contribution to the Equity Premium literature My motivation is to give the profession a critical look at the subject through the eyes of the researchers that have made fundamental contributions to the field Each essay is followed by an expert commentary The expository... and discussed at The Equity Premium Puzzle Conference,” held in October 2005 at the University of California, Santa Barbara, to commemorate the twentieth anniversary of the publication of The Equity Premium: A Puzzle.” The conference was sponsored by the Laboratory for Aggregate Economics and Finance at UCSB and North Holland I thank Finn Kydland, the director of LAEF, Scott Bentley, the executive editor... Sources 1.3 Estimates of the Equity Premium 1.4 Variation in the Equity Premium over Time 2 Is the Equity Premium due to a Premium for Bearing Non-Diversifiable Risk? 2.1 Standard Preferences References Appendix A Appendix B Appendix C Appendix D 2 2 3 6 9 11 14 25 29 29 35 35 JEL Classification: G10, G12, D9 Keywords: asset pricing, equity risk premium, CAPM, consumption CAPM, risk free rate puzzle... equity premium This chapter is organized into two parts Part 1 documents the historical equity premium in the United States and in selected countries with significant capital markets (in terms of market value) and comments on data sources Part 2 examines the question, “Is the equity premium a premium for bearing non-diversifiable risk? ” 1.1 An Important Preliminary Issue Any discussion of the equity premium. .. Premium 6.3 From the Past to the Future 7 Conclusion References Appendix 1: Decomposition of the Equity Premium Appendix 2: Data Sources for the DMS Database 12 History and the Equity Risk Premium 486 487 489 490 492 493 493 495 497 500 501 505 507 515 William N Goetzmann (Yale) and Roger G Ibbotson (Yale) 1 2 3 4 5 6 Introduction Historical Conception and Measurement of the Equity Risk Premium Stocks,... market for the past 110 years has been about 7.9 percent In the same period, the real return on a relatively riskless security was a paltry 1.0 percent The difference between these two returns, 6.9 percentage points, is the equity premium The generally accepted tenet of the neoclassical paradigm has been that the observed differences in the rates of return to financial assets, in particular, the large . Estimates of the Equity Premium 6 1.4. Variation in the Equity Premium Over Time 9 2. Is the Equity Premium Due to a Premium for Bearing Non-Diversifiable Risk? . Global Evidence on the Equity Premium 486 5.1. The Equity Premium Around the World 487 5.2. A Smaller Risk Premium 489 5.3. Survivorship of Markets 490 5.4.