Working Paper: CEPR ID: DP15610
Authors: Dmitry Kuvshinov; Kaspar Zimmermann
Abstract: This paper estimates the expected return on equity and housing for 17 advanced economies between years 1870 and 2015. We show that the expected risky return has been in steady decline, but its trend is markedly different to that in the safe rate. As a consequence, the ex ante risk premium exhibits large secular movements, and risk premia and safe rates are strongly negatively correlated. Our findings suggest that time-varying risk appetite is a key driver of expected risky and safe returns - not only in the short, but also in the long run.
Keywords: expected returns; risk premia; real interest rates; return predictability; long-run trends
JEL Codes: G12; G15; E43; E44; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected risky return (G17) | risk premium (G19) |
| safe rate (J28) | risk premium (G19) |
| risk premium (G19) | expected risky return (G17) |
| macroeconomic risks (E66) | risk premium (G19) |
| consumption volatility (E20) | risk premium (G19) |
| expected risky return (G17) | housing returns (R31) |
| expected risky return (G17) | equity returns (G12) |
| risk (D81) | expected risky return (G17) |
| risk (D81) | safe rates (J28) |