The Equity Premium Puzzle and the Ex Post Bias

Jakob Madsen

No 2004/01, FRU Working Papers from University of Copenhagen. Department of Economics. Finance Research Unit

Abstract: This paper argues that the high historical excess returns to equity are1 a result of a severe ex post bias over the period from 1915 to circa 1960 because inflation surprises during this period drove a wedge between ex ante and ex post returns to bonds. Furthermore, it is shown that ex ante and ex post returns to shares are identical in steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.5-3.9% over the past 130 years.

Keywords: equity premium; inflation expectations; expected returns (search for similar items in EconPapers)
JEL-codes: E1 E3 G0 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2004-10
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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