02144cam a22002417 4500001000700000003000500007005001700012008004100029100002200070245007900092260006600171490004200237500002000279520113800299530006101437538007201498538003601570690011201606710004201718830007701760856003801837856002701875w13423NBER20140711042221.0140711s2007 mau||||fs|||| 000 0 eng d1 aCampbell, John Y.10aEstimating the Equity Premium h[electronic resource] /cJohn Y. Campbell. aCambridge, Mass.bNational Bureau of Economic Researchc2007.1 aNBER working paper seriesvno. w13423 aSeptember 2007.3 aTo estimate the equity premium, it is helpful to use finance theory: not the old-fashioned theory that efficient markets imply a constant equity premium, but theory that restricts the time-series behavior of valuation ratios, and that links the cross-section of stock prices to the level of the equity premium. Under plausible conditions, valuation ratios such as the dividend-price ratio should not have trends or explosive behavior. This fact can be used to strengthen the evidence for predictability in stock returns. Steady-state valuation models are also useful predictors of stock returns given the high degree of persistence in valuation ratios and the difficulty of estimating free parameters in regression models for stock returns. A steady-state approach suggests that the world geometric average equity premium was almost 4% at the end of March 2007, implying a world arithmetic average equity premium somewhat above 5%. Both valuation ratios and the cross-section of stock prices imply that the equity premium fell considerably in the late 20th Century, but has risen modestly in the early years of the 21st Century. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w13423.4 uhttp://www.nber.org/papers/w13423 uurn:doi:10.3386/w13423