Abstract
In this paper we estimate the relation between the equity risk premium and the fundamental macroeconomic and financial variables in the United States during the period 1964-2012 by applying the standard OLS regression and the Hodrick-Prescott filter. Consequently, based on these results and applying the ARIMA models we forecast the evolution of the equity risk premium in the United States for the period 2013-2016. According to our results the equity risk premium in the United States is going to gradual increase in the following years, an evolution determined by the FED monetary policy perspectives, but also by the narrowing of the private consumption gap.
1. Introduction
The concept of equity risk premium (ERP) is a central one in modern finance and accounting theory, being related to the research of Markowitz (1952) on financial markets. There are several methods for estimating ERP (Cohen, 2009): firstly, the ERP can be estimated from the CAPM; secondly, by surveying investment professionals; thirdly, by using the actual returns unbiased estimates for the expected returns of assets.
3. Conclusions
This analysis allows us several interesting conclusions regarding the ERP in the United States. On the one hand, we may assist at a turning point of the ERP (inflexion from the decline over the past years to a gradual increase in the following years, as can be noticed in Fig. 3).
This evolution would be determined by the acceleration of the money supply, determined either by the re-launch of the investments flows in the economy and by the continuation of the FED monetary expansionism (at a slower pace). It seems that the dependence between the financial markets sentiment and the FED non-conventional monetary expansionism became very high. Consequently, we do not expect the inflexion of the FED monetary policy to be dramatic, as it might determine a shock for the stock markets, with negative consequences for the evolution of the real economy.
