DP5407 C-CAPM Without Ex Post Data

Author(s): Paul Söderlind
Publication Date: December 2005
Keyword(s): CBOE VIX, equity premium puzzle, Livingston survey, Survey of Professional Forecasters
JEL(s): E130, E320, G12
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5407

Survey and option data are used to take a new look at the equity premium puzzle. Survey data on equity returns (Livingston survey) shows much lower expected excess returns than ex post data. At the same time, option data (CBOE's VIX) indicates that investors overestimate the volatility of equity returns. Both facts reduce the puzzle. However, data on beliefs about output volatility (Survey of Professional Forecasters) shows marked overconfidence. On balance, the equity premium is somewhat less of a puzzle than in ex post data.