Review of Accounting Studies

, Volume 18, Issue 2, pp 560–639 | Cite as

Unconstrained estimates of the equity risk premium

  • Tristan Fitzgerald
  • Stephen Gray
  • Jason Hall
  • Ravi Jeyaraj


Estimates of the equity risk premium implied by analyst forecasts—generally 2–4 %—are often significantly below realized equity returns of 6 %. Measurement error could result from conservative assumptions, reliance upon consensus rather than detailed forecasts, the use of market rather than target prices, and regression analysis, which can be influenced by a small number of observations. We address these potential sources of measurement error. Our estimates are consistent with subsequently realized returns and capture systematic risk exposure. Alternative techniques could capture another form of priced risk or identify firm characteristics associated with systematic mispricing. From 1999 to 2008, we estimate an average equity risk premium in the United States of 5.3 %. The estimate increases from 3.1 % for 1999–2000 to 5.9 % from 2001 to 2008, comparable to the historical average of realized equity returns.


Analyst forecasts Cost of equity capital Long-term growth Equity risk premium Market risk premium 

JEL classification

G12—Asset pricing 



We appreciate the feedback from participants at the 2009 AFAANZ Conference and the 2010 Australasian Finance and Banking Conference, and an anonymous referee.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Tristan Fitzgerald
    • 1
  • Stephen Gray
    • 1
  • Jason Hall
    • 1
  • Ravi Jeyaraj
    • 1
  1. 1.UQ Business SchoolThe University of QueenslandSt Lucia, BrisbaneAustralia

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