DP15610 The Expected Return on Risky Assets: International Long-run Evidence

Author(s): Dmitry Kuvshinov, Kaspar Zimmermann
Publication Date: December 2020
Keyword(s): expected returns, long-run trends, real interest rates, return predictability, risk premia
JEL(s): E43, E44, G12, G15, N20
Programme Areas: Financial Economics, Economic History, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15610

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.