Unconstrained estimates of the equity risk premium
Published online: 8 May 2013
Ó Springer Science+Business Media New York 2013
Abstract Estimates of the equity risk premium implied by analyst forecasts—
generally 2–4 %—are often signiﬁcantly below realized equity returns of 6 %.
Measurement error could result from conservative assumptions, reliance upon
consensus rather than detailed forecasts, the use of market rather than target prices,
and regression analysis, which can be inﬂuenced by a small number of observations.
We address these potential sources of measurement error. Our estimates are con-
sistent with subsequently realized returns and capture systematic risk exposure.
Alternative techniques could capture another form of priced risk or identify ﬁrm
characteristics associated with systematic mispricing. From 1999 to 2008, we
estimate an average equity risk premium in the United States of 5.3 %. The estimate
increases from 3.1 % for 1999–2000 to 5.9 % from 2001 to 2008, comparable to the
historical average of realized equity returns.
Keywords Analyst forecasts Á Cost of equity capital Á Long-term growth Á
Equity risk premium Á Market risk premium
JEL classiﬁcation G12—Asset pricing
T. Fitzgerald Á S. Gray Á J. Hall (&) Á R. Jeyaraj
UQ Business School, The University of Queensland, St Lucia, Brisbane, QLD 4072, Australia
Rev Account Stud (2013) 18:560–639