NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Efstathios Avdis

University of Alberta
3-30B Business
Edmonton, AB
Canada T6G 2R6

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NBER Working Papers and Publications

November 2013Maximum likelihood estimation of the equity premium
with Jessica A. Wachter: w19684
The equity premium, namely the expected return on the aggregate stock market less the government bill rate, is of central importance to the portfolio allocation of individuals, to the investment decisions of firms, and to model calibration and testing. This quantity is usually estimated from the sample average excess return. We propose an alternative estimator, based on maximum likelihood, that takes into account information contained in dividends and prices. Applied to the postwar sample, our method leads to an economically significant reduction from 6.4% to 5.1%. Simulation results show that our method produces tighter estimates under a range of specifications.

Published: Efstathios Avdis & Jessica A. Wachter, 2017. "Maximum likelihood estimation of the equity premium," Journal of Financial Economics, .

 
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