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Conditional confidence intervals for the equity premium and other rates

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  • Samih Antoine Azar

Abstract

Almost all of the published estimates of the equity premium and of other rates, are point estimates. The original point of this article is to compute 95% confidence intervals for these parameters conditional on a theoretical dividend model. The monthly samples are considered to have a break after 1981, as deemed in the literature and this turns out to be appropriate. The main result is that these confidence intervals include all estimates of the parameters in the literature, making all of them probable. Moreover and contrary to the opinions held in the literature, the unexpected capital gains after 1981 were not due to an unexpected fall in discount rates but due to an unexpected fall in the difference between the discount rate and the growth rate.

Suggested Citation

  • Samih Antoine Azar, 2008. "Conditional confidence intervals for the equity premium and other rates," Applied Financial Economics, Taylor & Francis Journals, vol. 18(13), pages 1085-1089.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:13:p:1085-1089
    DOI: 10.1080/09603100701413239
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    References listed on IDEAS

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    1. Ľluboš Pástor & Robert F. Stambaugh, 2001. "The Equity Premium and Structural Breaks," Journal of Finance, American Finance Association, vol. 56(4), pages 1207-1239, August.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, April.
    4. James Claus & Jacob Thomas, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
    5. Kim, Dongcheol & Kon, Stanley J, 1994. "Alternative Models for the Conditional Heteroscedasticity of Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(4), pages 563-598, October.
    6. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-537, October.
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    Cited by:

    1. Marcin Olkiewicz, 2022. "The Impact of Economic Indicators on the Evolution of Business Confidence during the COVID-19 Pandemic Period," Sustainability, MDPI, vol. 14(9), pages 1-17, April.

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