You’ve used the ‘wrong’ risk free rate Your ERP estimate can be incorrect if you’re not applying it in the same manner in which you estimated it. This isn’t as much an issue of there being a ‘right’ risk-free rate, but we have to compare apples with apples. The ERP estimated with risk-free as T-Bills…
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…
You base your estimates of the ERP on US history alone Your ERP estimate is too high because your calculation suffers from survivorship bias and errs by including the largest economy for which the most data is currently available rather than a random sample. The US has been a spectacularly successful economy over the last…
The Equity Risk Premium (ERP) is the expected excess return priced into equities as reward for bearing risk. Equities are expected to provide greater returns because they are riskier than, say, government bonds. The historical ERP experienced (and prospectively estimated by some) is higher than many theoretical assessments of what it should be based on…
