Some interesting papers on the ERP:
- Interesting not least because it is a survey of required Equity Risk Premiums (or Market Risk Premiums) rather than expected. The rates are higher than I use, although this is also useful information when attempting to perform a “benchmark” valuation. I still struggle to see how these high estimates tie in with prospective estimates of overall economic growth and market performance, which is an important sense-check on any ERP estimate.
- The results show a range from 3% to 10%, and that 51 books use different equity premia in various pages. The 5-year moving average has declined from 8.4% in 1990 to 5.7% in 2008 and 2009. This declining trend has been observed over even longer periods and is one of the common reasons for mis-estimating the ERP.
- This work provides a fairly in-depth analysis of the differences between the various definitions of ERP and a comprehensive survey of major sources for estimates of these. In general, the estimates of the Expected ERP over T-bonds (rather than short-dated T-bills) are in line with the range I use of 3% to 5% with several showing values to the lower end of this range.
The debate certainly isn’t over, but these papers and the referenced papers, research and textbooks are a good starting place to get up to speed.