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Journal of Economic Perspectives: Vol. 23 No. 1 (Winter 2009)

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The U.S. Equity Return Premium: Past, Present, and Future

Article Citation

DeLong, J. Bradford, and Konstantin Magin. 2009. "The U.S. Equity Return Premium: Past, Present, and Future." Journal of Economic Perspectives, 23(1): 193-208.

DOI: 10.1257/jep.23.1.193

Abstract

For more than a century, diversified long-horizon investments in America's stock market have consistently received much higher returns than investors in bonds: a return gap averaging 6 percent per year. An enormous amount of creative and ingenious work by a great many economists has gone into seeking explanations for the so-called "equity premium return puzzle," but so far without a fully satisfactory answer. We first review the facts about the equity premium and then discuss a range of explanations that have been proposed. We conclude that the equity premium puzzle has not been solved: it remains a puzzle. And we anticipate that the equity return premium will continue, albeit at a smaller level than in the past - perhaps four percent per year. (The final draft of this paper was written before the recent stock market crash. As of October 2008, we can say that the crash does not fundamentally alter our conclusions and actually strengthens the case for a substantial future equity premium.)

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Authors

DeLong, J. Bradford (U CA, Berkeley)
Magin, Konstantin (U CA, Berkeley)

JEL Classifications

G12: Asset Pricing; Trading volume; Bond Interest Rates
G14: Information and Market Efficiency; Event Studies

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