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CRIEFF Discussion Paper Number 0711

The Equity Premium: 100 Years of Empirical Evidence from the UK

Andrew Vivian

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We examine the UK equity premium over more than a century using dividend growth to estimate expectations of capital gains employing the approach of Fama and French (2002). Over recent decades estimated equity premia implied by dividend growth have been much lower than that produced by average stock returns for the UK market as a whole; a finding corroborated by all economic sub-sectors. Our empirical analysis suggests this is primarily due to a declining discount rate, during the latter part of the 20th Century, which would rationally stimulate unanticipated equity price rises during this period. Thus, we conclude that historical stock returns over recent decades have been above investors’ expectations.

JEL codes: G10, G12

Keywords: Equity Premium; Expected Returns; Dividend Growth Predictability