The Equity Risk Premium, Market Factors and the Maturing Economy Hypothesis

Michael Devaney
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Michael Devaney: Southeast Missouri State University

Journal of Economic Insight, 2009, vol. 35, issue 1, 49-69

Abstract: Researchers have attributed the significant decline in the volatility of real GDP growth among maturing nations over the last thirty years to a decrease in the influence of destabilizing factors. It is hypothesized that many of the same macro factors have had a similar decreasing impact on the long-run equity risk premium (ERP) as the U.S. economy has matured. A model developed by Perron (1989) and Perron and Vogelsang (1992) is used to identify a 1954 break in the ERP. ARCH and GARCH effects found in the 1870-2002 ERP disappear in pre and post break estimates of the model as do the significance of macro variables. The results lend partial support to the hypothesis that broad market factors such as money supply, productivity and population change imparted greater influence on the ERP during the first half of the 20th century.

JEL-codes: G12 N20 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:mve:journl:v:35:y:2009:i:1:p:49-69

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