The equity risk premium

Norges Bank Investment Management

Research

47 Pages

Norges Bank Investment Management examines the equity risk premium and why stocks have historically delivered returns far above cash and bonds despite extreme volatility. The paper argues that investor behavior, economic uncertainty, and shifting monetary conditions may explain why expected premiums remain difficult to forecast.

Key Takeaways

Historical Premium Strength: US equities delivered roughly 7% annual excess returns versus bills, while other developed markets averaged about 5.5%.
Expected World ERP: Dividend discount and regression models estimated a forward looking global ERP near 3% to 4% following the financial crisis.
Puzzle Still Unsolved: Annual ERP volatility ranged from 17% to 30% across markets, challenging traditional consumption based models and fueling the equity premium puzzle.
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