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RESEARCH

Persistently high equity risk premium unprecedented

This paper by the Federal Reserve Bank of New York looks at the equity risk premium information from 20 models and estimates the ERP for various time periods. Extraordinarily it finds that the (preferred) estimator places the one-year equity premium in July 2013 at 14.5 percent, the highest level in 50 years and well above the 10.5 percent that was reached
during the financial crisis in 2009.

The models also show broad agreement that the term structure of  equity risk premia is high and flat: expected excess returns at all foreseeable horizons are just as high as  at the one-year horizon. A high equity premium that is not expected to mean-revert in the near future is an unprecedented phenomenon. Because expected dividend growth has not been above average in 2013, the paper concludes the high equity premium is mostly due to unusually low discount rates at all horizons.

 

To access the article, The Equity Risk Premium: A Consensus of Models, click here

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