02148cam a22002297 4500001000600000003000500006005001700011008004100028100002200069245012700091260006600218490004100284500001900325520121400344530006101558538007201619538003601691710004201727830007601769856003701845856003601882w0444NBER20150903114743.0150903s1980 mau||||fs|||| 000 0 eng d1 aMerton, Robert C.10aOn Estimating the Expected Return on the Marketh[electronic resource]:bAn Exploratory Investigation /cRobert C. Merton. aCambridge, Mass.bNational Bureau of Economic Researchc1980.1 aNBER working paper seriesvno. w0444 aFebruary 1980.3 aThe expected market return is a number frequently required for the solution of many investment and corporate finance problems, but by comparison with other financial variables, there has been little research on estimating this expected return. Current practice for estimating the expected market return adds the historical average realized excess market returns to the Current observed interest rate. While this model explicitly reflects the dependence of the market return on the interest rate, it fails to account for the effect of changes in the level of market risk. Three models of equilibrium expected market returns which reflect this dependence are analyzed in this paper. Estimation procedures which incorporate the prior restriction that equilibrium expected excess returns on the market must be positive arc derived and applied to return data for the period 1926- 1978. The principal conclusions from this exploratory investigation are: (1) in estimating models of the expected market return. the non-negativity restriction of the expected excess return should be explicitly included as part of the specification; (2) estimators which use realized returns should be adjusted for heteroscedasticity. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w0444.4 uhttp://www.nber.org/papers/w044441uhttp://dx.doi.org/10.3386/w0444