Authors: Madsen, Jakob¹; Dzhumashev, Ratbek²

Source: Applied Financial Economics, Volume 19, Number 2, January 2009 , pp. 157-174(18)

Publisher: Routledge, part of the Taylor & Francis Group

Abstract:

This article argues that high historical excess returns to equity were the result of a severe ex post bias in the period from 1915 to ca 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 stocks are identical in a steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.3-4.4% over the past 132 years.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/09603100701765174

Affiliations: 1: Department of Economics, Monash University, Caulfield East, 3145 Australia,University of Copenhagen, Copenhagen, Denmark 2: Department of Economics, Monash University, Caulfield East, 3145 Australia

Publication date: 2009-01-01

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