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The equity premium puzzle and the ex post bias

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  • Jakob Madsen
  • Ratbek Dzhumashev

Abstract

This article argues that high historical excess returns to equity were the result of a severe ex post bias in the period from 1915 to ca 1960 because inflation surprises during this period drove a wedge between ex ante and ex post returns to bonds. Furthermore, it is shown that ex ante and ex post returns to stocks are identical in a steady state. Adjusting the ex post equity premium by the ex post bias reduces the equity premium to an arithmetic mean of 3.3-4.4% over the past 132 years.

Suggested Citation

  • Jakob Madsen & Ratbek Dzhumashev, 2009. "The equity premium puzzle and the ex post bias," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 157-174.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:2:p:157-174
    DOI: 10.1080/09603100701765174
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    References listed on IDEAS

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    1. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," American Economic Review, American Economic Association, vol. 93(2), pages 392-397, May.
    2. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.
    3. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
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    Cited by:

    1. van Ewijk, Casper & de Groot, Henri L.F. & Santing, A.J. (Coos), 2012. "A meta-analysis of the equity premium," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 819-830.
    2. Rieger, Marc Oliver & Wang, Mei, 2012. "Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data," Finance Research Letters, Elsevier, vol. 9(2), pages 63-72.
    3. Marc Oliver Rieger & Thorsten Hens & Mei Wang, 2013. "International Evidence on the Equity Premium Puzzle and Time Discounting," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 149-163, September.
    4. Philip Jagd & Jakob Madsen, 2009. "Myopic loss aversion, bond returns and the equity premium puzzle," Applied Financial Economics, Taylor & Francis Journals, vol. 19(17), pages 1383-1390.

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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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