No. of Recommendations: 5
I calculate an average equity premium (1yrExcessSR) of 6.1% using the Shiller CAPE data. This is close to what Wikipedia writes "around 5% to 8% in the United States".
avg
AvgCAEYb 7.7%
Avg10yrStockSR 6.7%
Avg5yrStockSR 7.0%
Avg3yrStockSR 7.2%
Avg1yrStockSR 8.4%
10yrExcessSR 4.6%
5yrExcessSR 4.9%
3yrExcessSR 5.0%
1yrExcessSR 6.1%
"The equity risk premium is equal to the difference between equity returns and returns from government bonds. It is equal to around 5% to 8% in the United States. The risk premium represents the compensation awarded to the equity holder for taking on a higher risk by investing in equities rather than government bonds. However, the 5% to 8% premium is considered to be an implausibly high difference and the equity premium puzzle refers to the unexplained reasons driving this disparity."
https://en.wikipedia.org/wiki/Equity_premium_puzzl...Some preliminary actionable signals:
high CAEYb (qCAEYb=4)
expect high Avg1yrStockSR (high 1-year real stock return)
increase stock leverage
low CAEYb (qCAEYb=0)
expect low Avg3yrExcessSR (stock return lower than bond return)
wait 1 year, and then increase bond weight.
(Avg3yrExcessSR is lower than Avg1yrExcessSR, and so the best relative bond returns were in years 2 and 3.)
But averages can hide problems, and so more work is needed on this possible signal.
