Estimating The Equity Risk Premium
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A History Of The Equity Risk Premium And Its Estimation
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Author : Basil Copeland
language : en
Publisher:
Release Date : 2014
A History Of The Equity Risk Premium And Its Estimation written by Basil Copeland and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
The estimation of the equity (or "market") risk premium has become a cottage industry, both for academics and professionals. It is recognized as a key economic or financial parameter for a variety of interests and applications, yet opinions as to its magnitude either historical or projected vary widely. But not as widely as was once the case. There has been general acceptance, a consensus if you will, that historical equity return premia overstate what was anticipated or expected and that a large component of the historical equity return premium constitutes unanticipated capital gains. This paper explores the history of this idea and examines the role this it plays (or not) in a variety of recent and current methods of estimating the equity risk premium. Using a methodology similar to Fama and French (2002) but presaged in Copeland (1982) I describe the behavior of ex post and ex ante risk premia for the period 1872 to 2013 and estimate the equity risk premium going forward for the next 10 years (2014-2023). I also discuss various issues in the estimation of the equity risk premium, such as geometric versus arithmetic mean, top down versus bottom up forecasts of the equity risk premium, and whether to use dividend yields or P/E multiples in accounting for unanticipated capital gains. I conclude that the arithmetic equity risk premium as usually calculated is significantly overstated and that the current and expected future ERP is in the range of 3-4 percent for both geometric and arithmetic means, though likely in the upper half of this range.
Estimating The Equity Risk Premium With Time Series Forecasts Of Earnings
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Author : Kristian D. Allee
language : en
Publisher:
Release Date : 2011
Estimating The Equity Risk Premium With Time Series Forecasts Of Earnings written by Kristian D. Allee and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
The size of the equity risk premium remains an unanswered question in the accounting and finance literature. This study proposes a new approach to reverse-engineer the equity risk premium, distinct from prior research, in that it does not rely on analysts' forecasts to proxy for the market's earnings expectations. That I instead use time-series earnings forecasts allows an investigation of the equity risk premium across a broader cross-section of firms, including smaller firms that are not covered by analysts. This study finds that risk premia are significantly higher for firms not followed by analysts. This suggests that studies requiring analysts' earnings forecasts to estimate the equity risk premium have likely underestimated its overall level. Additional validity tests on my firm- and year-specific risk premium estimates reveal that these estimates consistently and predictably relate to multiple measures of risk, particularly for firms not followed by analysts.
Estimating The Equity Risk Premium
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Author : David Biery
language : en
Publisher:
Release Date : 2016
Estimating The Equity Risk Premium written by David Biery and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
The Equity Risk Premium A Contextual Literature Review
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Author : Laurence B. Siegel
language : en
Publisher: CFA Institute Research Foundation
Release Date : 2017-12-08
The Equity Risk Premium A Contextual Literature Review written by Laurence B. Siegel and has been published by CFA Institute Research Foundation this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-12-08 with Business & Economics categories.
Research into the equity risk premium, often considered the most important number in finance, falls into three broad groupings. First, researchers have measured the margin by which equity total returns have exceeded fixed-income or cash returns over long historical periods and have projected this measure of the equity risk premium into the future. Second, the dividend discount model—or a variant of it, such as an earnings discount model—is used to estimate the future return on an equity index, and the fixed-income or cash yield is then subtracted to arrive at an equity risk premium expectation or forecast. Third, academics have used macroeconomic techniques to estimate what premium investors might rationally require for taking the risk of equities. Current thinking emphasizes the second, or dividend discount, approach and projects an equity risk premium centered on 3½% to 4%.
The Equity Risk Premium
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Author : Bradford Cornell
language : en
Publisher: John Wiley & Sons
Release Date : 1999-05-26
The Equity Risk Premium written by Bradford Cornell and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999-05-26 with Business & Economics categories.
Das Thema Risikoprämie für Aktien (Equity Risk Premium) wird hier zum ersten Mal verständlich erklärt. Die Risikoprämie für Aktien stellt einen Renditeausgleich dar für das erhöhte Risiko, das ein Anleger bei der Investition in Aktien eingeht, im Vergleich zu einer Investition in risikofreie Staatsanleihen. Die Risikoprämie ist zwar von der Theorie her einfach, jedoch in der Praxis ein sehr komplexes Phänomen. Für Finanzentscheidungen ist es von größter Bedeutung, daß man das Prinzip der Risikoprämie versteht und es anwenden kann. Cornell erläutert das Thema Schritt für Schritt sehr anschaulich und ohne terminologischen Ballast. Zunächst wird die Risikoprämie im Zusammenhang mit der Geschichte des Aktienmarktes betrachtet. Der Haussemarkt der 90er dient dabei als Fallstudie. Cornell zeigt, welche Rückschlüsse man durch die Analyse der Risikoprämie im historischen Verlauf für den Aktienmarkt ziehen kann, z.B. ob Aktienkurse steigen oder fallen oder ob sich der Aktienmarkt verändert. Vorausschauende Schätzungen der Risikoprämie werden anhand verschiedener konkurrierender Modelle analysiert, wobei die Vorzüge der jeweiligen Methode mitbewertet werden. 'Equity Risk Premium' ist das erste Buch, das dieses wichtige Prinzip der Risiko-Nutzen-Analyse erschöpfend behandelt. Es vermittelt einen tiefen Einblick und deckt alle Grundlagen ab, damit Investoren fundierte Finanzentscheidungen treffen können. Ein absolutes Muß für institutionelle Anleger, Geldmanager und Finanzvorstände, die auf eine fundierte Marktanalyse zurückgreifen müssen. (06/99)
Equity Risk Premiums Erp
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Author : Aswath Damodaran
language : en
Publisher:
Release Date : 2017
Equity Risk Premiums Erp written by Aswath Damodaran and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
The equity risk premium is the price of risk in equity markets and is a key input in estimating costs of equity and capital in both corporate finance and valuation. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating the equity risk premium, historical returns are used, with the difference in annual returns on stocks versus bonds, over a long period, comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums - the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. In the next section, we look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.
The Equity Risk Premium
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Author : William N. Goetzmann
language : en
Publisher: Oxford University Press
Release Date : 2006-11-16
The Equity Risk Premium written by William N. Goetzmann and has been published by Oxford University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006-11-16 with Business & Economics categories.
This book aims to create a strong understanding of the empirical basis for the equity risk premium. Through the research and anaylsis of two scholars who are experts in this field, this volume presents the key issues that are paramount to investors, including whether or not to use historical data as a method of equity investing, and can the equity premium reflect changes in fundamental values and cash flows of the market.
Equity Risk Premiums Erp
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Author : Aswath Damodaran
language : en
Publisher:
Release Date : 2009
Equity Risk Premiums Erp written by Aswath Damodaran and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with Equity categories.
Estimating The Equity Risk Premium Using Implied Cost Of Capital
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Author : Ruihao Ke
language : en
Publisher:
Release Date : 2014
Estimating The Equity Risk Premium Using Implied Cost Of Capital written by Ruihao Ke and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
Research on the implied cost of capital (ICC) has found that the equity risk premium is approximately 3%, on average, much lower than estimates based on the mean of historical stock market returns. The validity of such ICC estimates, however, faces both theoretical and empirical challenges. The theoretical equivalence between ICC and expected return requires the stringent condition that the latter is a constant, which is inconsistent with theory and empirical evidence. The empirical estimation of ICC depends on short-run and long-run earnings forecasts, whose biases can severely limit the validity of the estimates. By employing a forecasting procedure that induces little bias in both short-run and long-run forecasts and taking into account the stochastic nature of expected returns, we show that the average market risk premium ranges between 3% and 6%. We also demonstrate that the results of prior research are affected by input errors that are partially self-canceling.
Equity Risk Premiums Erp
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Author : Aswath Damodaran
language : en
Publisher:
Release Date : 2015
Equity Risk Premiums Erp written by Aswath Damodaran and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
Equity risk premiums are a central component of every risk and return model in finance and are a key input in estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating the equity risk premium, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums - the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. In the next section, we look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.