Equity premium estimates from economic fundamentals under structural breaks

Smith, Simon C. (2017) Equity premium estimates from economic fundamentals under structural breaks. International Review of Financial Analysis, 52. pp. 49-61. ISSN 1057-5219

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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).

Item Type:

Journal Article

Journal or Publication Title:

International Review of Financial Analysis

Additional Information:

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

Uncontrolled Keywords:

/dk/atira/pure/subjectarea/asjc/2000/2003

Subjects:

?? equity premiumstructural breakbayesian analysisfinanceeconomics and econometrics ??

Departments:

Lancaster University Management School > Accounting & Finance

ID Code:

86198

Deposited By:

ep_importer_pure

Deposited On:

04 May 2017 10:58

Refereed?:

Yes

Published?:

Published

Last Modified:

21 Sep 2024 00:45

URI:

https://eprints.lancs.ac.uk/id/eprint/86198