Session 7: Implied and Country Equity Risk Premiums

Thi’s class was spent talking mostly about equity risk premiums. The key theme to take away is that equity risk premiums don’t come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium. It is with this objective in mind that we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2024 update: ~adamodar/pc/implprem/ Play with the spreadsheet. In fact, try it with today’s index level and rate and see what the ERP is right now. I also noted the path of historical implied equity risk premiums, and how they have become more unstable and higher since 2008, mentioning