Unexpected Capital Gains and the Stock Market Performance at the Turn of the Century

Abstract

For five countries, Australia, France, Germany, the United Kingdom and the United States, this paper revisits the unexpected capital gain issue often discussed in the literature on the equity risk premium. The first part of the paper presents a brief survey of recent papers tackling this problem. Next, we contrast ex-ante measures of stock returns (as determined at the end of the 1980s) with actual total stock returns observed subsequently. We conduct our analysis on two time periods, first 1989:Q4–1999:Q4 and then 1989:Q4–2004:Q4. For the first time period, our results show that investors benefited from huge unanticipated capital gains in the five countries. For the time period ending in the fourth quarter of 2004, we show that ex-post returns are not fundamentally at odds with expected returns in all five countries although caution should be exercised in some cases. Last, we also briefly discuss the issue of market risk at the end of the 20th century, its impact on stock market valuation and assess the robustness of our results by looking at two different starting dates.