Why you’re mis-estimating the Equity Risk Premium #2

You’ve used too short a period

Your ERP estimate can be way too high or way too low.  The standard errors of estimates of the ERP are typically huge since the variability in equity returns is so high. To get a solid estimate within a narrow confidence interval requires many decades of data.

It’s true that the ERP itself may change over time, but estimates of very short periods are not reliable.

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Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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