australiaen
Estimating the equity risk premium

Estimating the equity risk premium

28-06-2017 | From the field

Assessing the equity risk premium (ERP) is an ongoing debate among academics.

  • Laurens Swinkels
    Laurens
    Swinkels
    Researcher

Norges Bank Investment Management (NBIM) published a discussion note* on the ERP, in response to the question of whether the Norwegian Sovereign Wealth Fund should further increase its allocation to equities from its current 60 percent. This elaborate overview article describes various explanations put forward by researchers to explain the observed magnitude of the world ERP and its dynamic behavior over time.

They estimate the future world ERP based on historical averages, fundamentals, predictive and cross-sectional regressions, and dividend discount models. Although these models produce different estimates, they generally suggest the long-term world ERP will be between 3 and 4% per annum going forward. For the next five years, Robeco is a bit more optimistic, with an expected ERP of 5.75%, as described in our “Expected Returns 2017-2021” paper.

* “The equity risk premium”, NBIM Discussion note, October 2016.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe
From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

Read all articles
Subjects related to this article are:

Related articles

See all
Logo

Disclaimer

BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.

What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
I Disagree