Measuring the Market Risk Premium

This code updates the measure of equity risk premium.

We use the dividend-price ratio, cay and the three-month T-bill to predict future excess returns

• Haddad Valentin, Erik Loualiche, and Matthew Plosser: Buyout Activity: the Impact of Aggregate Discount Rates; Journal of Finance, February 2017, 72:1
• Download the paper
• Download the data

Data Sources

1. Measuring Dividend Price ratio uses CRSP Monthly Index files available on WRDS
   • msi.sas7bdat downloaded from /wrds/crsp/sasdata/a_stock/msi.sas7bdat
   • See the calculations to account for reinvested dividends in this note on how
2. Measuring the risk-free rate from H15 release available on FRED
3. Measuring cay from Lettau's website. Last downloaded on March 23rd 2020

Latest estimates

===========================================================
                             Future Excess Returns         
-----------------------------------------------------------
D/P ratio                           3.370***               
                                    (0.436)                
                                                           
cay                                 1.814***               
                                    (0.246)                
                                                           
T-bill (three-month)               -1.246***               
                                    (0.163)                
                                                           
Constant                             0.011                 
                                    (0.013)                
                                                           
Observations                          264                  
R2                                   0.344                 
F Statistic                 45.459*** (df = 3; 260)        
-----------------------------------------------------------
Notes:               ***Significant at the 1 percent level.
                     **Significant at the 5 percent level. 
                     *Significant at the 10 percent level.