What is an Appropriate Value of the Equity Risk Premium?

Abstract

There has been considerable interest in recent times in the nature of the process generating the equity risk premium, although there is little consensus on an appropriate value of the risk premium today. This article takes a different approach and model, the ex ante risk premium implied from the information contained in the share price. Using the discounted dividend model, it is possible to infer the expected future risk premium. These estimates, less volatile than the traditional ex post approach, suggest that the average risk premium lies between 4.5% and 5.4% per year in both the long and the short term.