NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Equity Premium and Structural Breaks

Lubos Pastor, Robert F. Stambaugh

NBER Working Paper No. 7778*
Issued in July 2000
NBER Program(s):   AP

A long return history is useful in estimating the current equity premium even if the historical distribution has experienced structural breaks. The long series helps not only if the timing of breaks is uncertain but also if one believes that large shifts in the premium are unlikely or that the premium is associated, in part, with volatility. Our framework incorporates these features along with a belief that prices are likely to move opposite to contemporaneous shifts in the premium. The estimated premium since 1834 fluctuates between four and six percent and exhibits its sharpest drop in the last decade.

*Published: Pastor, Lubos and Robert F. Stambaugh. "The Equity Premium And Structural Breaks," Journal of Finance, 2001, v56(4,Aug), 1207-1239.

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