The declining U.S. equity premium

Ravi Jagannathan, Ellen McGrattan and Anna Scherbina

Quarterly Review, 2000, vol. 24, issue Fall, 3-19

Abstract: 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.

Keywords: Stock; market (search for similar items in EconPapers)
Date: 2000
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

Downloads: (external link)
http://minneapolisfed.org/research/qr/qr2441.html (text/html)
http://minneapolisfed.org/research/qr/qr2441.pdf (application/pdf)

Related works:
Working Paper: The Declining U.S. Equity Premium (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmqr:y:2000:i:fall:p:3-19:n:v.24no.4

Access Statistics for this article

More articles in Quarterly Review from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().