Unconstrained estimates of the equity risk premium

Fitzgerald, Tristan, Gray, Stephen, Hall, Jason and Jeyaraj, Ravi (2013) Unconstrained estimates of the equity risk premium. Review of Accounting Studies, 18 2: 560-639. doi:10.1007/s11142-013-9225-z

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Author Fitzgerald, Tristan
Gray, Stephen
Hall, Jason
Jeyaraj, Ravi
Title Unconstrained estimates of the equity risk premium
Journal name Review of Accounting Studies   Check publisher's open access policy
ISSN 1380-6653
Publication date 2013-06-01
Sub-type Article (original research)
DOI 10.1007/s11142-013-9225-z
Open Access Status Not Open Access
Volume 18
Issue 2
Start page 560
End page 639
Total pages 80
Place of publication New York, NY, United States
Publisher Springer
Language eng
Abstract Estimates of the equity risk premium implied by analyst forecasts-generally 2-4 %-are often significantly below realized equity returns of 6 %. Measurement error could result from conservative assumptions, reliance upon consensus rather than detailed forecasts, the use of market rather than target prices, and regression analysis, which can be influenced by a small number of observations. We address these potential sources of measurement error. Our estimates are consistent with subsequently realized returns and capture systematic risk exposure. Alternative techniques could capture another form of priced risk or identify firm characteristics associated with systematic mispricing. From 1999 to 2008, we estimate an average equity risk premium in the United States of 5.3 %. The estimate increases from 3.1 % for 1999-2000 to 5.9 % from 2001 to 2008, comparable to the historical average of realized equity returns.
Keyword Analyst forecasts
Cost of equity capital
Long-term growth
Equity risk premium
Market risk premium
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2014 Collection
UQ Business School Publications
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Citation counts: TR Web of Science Citation Count  Cited 1 times in Thomson Reuters Web of Science Article | Citations
Scopus Citation Count Cited 1 times in Scopus Article | Citations
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