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equity risk premium
The extra reward investors get for buying a share over what they get for holding a less risky asset, such as a government bond. Modern financial theory assumes that the premium will be just big enough on average to compensate the investor for the extra risk. However, studies have found that the average equity premium over many years has been much larger than appears to be justified by the average riskiness of shares. To solve this so-called equity premium puzzle, some economists have suggested that investors may have greater risk aversion towards shares than traditional theory assumes. Some claim that the past equity premium was mismeasured, or reflected an unrepresentative sample of share prices. Others suggest that the high premium is evidence that the efficient market hypothesis does not apply to the stock market. Some economists think that the premium fell to more easily explained levels during the 1990s. Nobody really knows which, if any, of these interpretations is right.
- Part of Speech: noun
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- Industry/Domain: Economy
- Category: Economics
- Company: The Economist
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