TY  - JOUR
AU  - Jagannathan,Ravi
AU  - McGrattan,Ellen R.
AU  - Scherbina,Anna
TI  - The Declining U.S. Equity Premium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8172
PY  - 2001
Y2  - March 2001
UR  - http://www.nber.org/papers/w8172
L1  - http://www.nber.org/papers/w8172.pdf
N1  - Author contact info:
Ravi Jagannathan
Kellogg Graduate School of Management
Northwestern University
2001 Sheridan Road
Leverone/Anderson Complex
Evanston, IL 60208-2001
Tel: 847/491-8338
Fax: 847/491-5719
E-Mail: rjaganna@northwestern.edu

Ellen McGrattan
Research Department
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55480
Tel: 612/204-5523
Fax: 612/204-5515
E-Mail: erm@mcgrattan.mpls.frb.fed.us

Anna Scherbina
Graduate School of Management
UC Davis
One Shields Avenue
Davis, CA 95616-8609
Tel: 617 495-1047
E-Mail: ascherbina@ucdavis.edu
AB  - This study demonstrates that the U.S. equity premium has declined significantly during the last three decades. The study calculates the equity premium using a variation of a formula in the classic Gordon stock valuation model. The calculation includes the bond yield, the stock dividend yield, and the expected dividend growth rate, which in this formulation can change over time. The study calculates the premium for several measures of the aggregate U.S. stock portfolio and several assumptions about bond yields and stock dividends and gets basically the same result. The premium averaged about 7 percentage points during 1926 70 and only about 0.7 of a percentage point after that. This result is shown to be reasonable by demonstrating the roughly equal returns that investments in stocks and consol bonds of the same duration would have earned between 1982 and 1999, years when the equity premium is estimated to have been zero.
ER  -