Global evidence on the equity risk premium

Dimson, E, Marsh, P and Staunton, M (2003) Global evidence on the equity risk premium. Working Paper. London Business School IFA Working Paper.

Abstract

Today, investors have more cause than ever to ask what returns they can expect from equities, and what the future riskreward tradeoff is likely to be. Corporate managers, too, need to know what returns their shareholders require for projects of differing risk. And regulators have to know the cost of equity capital in order to set "fair" rates of return for regulated industries. In fact, the magnitude of the equity risk premium the incremental return that shareholders require to hold risky equities rather than riskfree securities is one of the most important issues in corporate fice. It drives future equity returns and is a key determit of the cost of capital. This article sheds light on the equity risk premium by addressing two fundamental questions: How big has the equity risk premium been historically? And what can we expect for the future? To answer these questions, we need to look at long periods of capital market history, and to extend our horizons beyond just the United States. We start by examining equity returns in 16 different countries over the 103year period from 1900 to 2002