Comments on: The equity premium and the Economists Voice

By: John Quiggin

John Quiggin — Mon, 19 Sep 2005 22:53:35 +0000

For those interested, there's a longer and more technical survey of the equity premium literature here. In response to Paul, the aim was to get the main points across in less than 2000 words, which meant cutting out responses to a lot of your questions. I'm sorry if you found the result opaque, though the questions you raise suggest that you got at least something out of it. Dave, the historical average real rate of return to short-term bonds has been about 1 per cent.

By: dave heasman

dave heasman — Mon, 19 Sep 2005 14:01:33 +0000

This bit of the intro : – “the well-known fact that the average annual historical return of stocks is seven times that of government bonds and other debt” woke me up.

Is this really true? Seven times?
Over a long historical period?
I guess there are a lot of Government Bonds that have crap returns and are just hidden fraud – the UK WWII War Loan f’rexample – but surely the overall return on all Govt bonds & debt is about/over 3%?
Is the overall rate of return on all stocks really 20% or so? Over a long period? Seems incredible, or I’m missing something obvious.

By: paul

paul — Mon, 19 Sep 2005 13:45:45 +0000

As an example of economists talking to other economists who have all read the relevant literature, it’s a fine paper (and interesting in its results). If the authors are trying to reach interested non-economists, they should unpack all of the causal chains leading to their conclusions in significantly greater detail. After three or four readings, I still trying to puzzle out basic issues such as what it means for the equity premium to be real—does it mean that the implied risk aversion arises rationally or that the market failure comes from an otherwise necessary evolution of market institutions? Does it mean that people who stick with either stocks or bonds for the long term are simply irrational in their valuations? Are the effects of various policy measures being gauged in real dollars or against imputed utility functions? If these questions don’t matter, why don’t they matter?

The economists who wrote for the public back in the age of giants and dinosaurs took pains to make their arguments as accessible as possible, but that doesn’t seem to be the case here. I guess I’m just not the target audience.

By: Tim Worstall

Tim Worstall — Mon, 19 Sep 2005 07:23:28 +0000

John Quggin and the Equity Premium.

John Quiggin of Crooked Timber has a new paper out about the Equity Premium. Serious science of course and thus not only not understandable but also not available to mere mortals like myself. Larry Elliott in The Guardian has a

By: David Kane

David Kane — Mon, 19 Sep 2005 02:24:28 +0000

dsquared (who I hestitate to tangle with) claims that “Grant and Quiggin on the equity risk premium is an article that any high-end technical journal would have been pleased to have published.”

Untrue! High-end technical journals (by which I assume you mean things like AER, QJE, JPE and so on) do not publish these sorts of pieces (unless authored by Nobel laureates). No math. No modeling. No statistics.

Which is a shame, of course.

By: John Quiggin

John Quiggin — Sun, 18 Sep 2005 06:33:35 +0000

Maynard, the equity premium is pretty robust, applying (AFAIK) to all stock markets with a sufficiently long history to allow estimation. Certainly it’s not confined to the US.

By: Delicious Pundit

Delicious Pundit — Sun, 18 Sep 2005 03:50:09 +0000

It’s intended to contain deeper analysis than is found on the Op-Ed page of the Wall Street Journal

So many jokes could go here! Some pitches off the top of my head:

…but then, a used Starbucks “The Way I See It” cup contains deeper analysis than is found on the Op-Ed page of the Wall Street Journal.

…while still blaming everything on crypto-Marxist community college professors.

…but we spilled something on our “News Corporation Heritage Foundation Talking Points presented by Alcoa,” so we had to think of something on our own.

By: Maynard Handley

Maynard Handley — Sun, 18 Sep 2005 02:49:15 +0000

“the well-known fact that the average annual historical return of stocks is seven times that of government bonds and other debt”

I don’t want to be snarky here, just specific. Is this well-known fact not a fact about US stocks in the 20th century? Does this really generalize to the rest of the world? Is it true of Britain? Europe? Japan? Emerging markets?

By: Kieran Healy

Kieran Healy — Sat, 17 Sep 2005 22:39:05 +0000

an article that any high-end technical journal would have been pleased to have published

Perhaps sometime around 2009, from what I understand of the review pipeline at major economics journals.

By: dsquared

dsquared — Sat, 17 Sep 2005 22:31:27 +0000

By the way, casual readers, JQ is too modest to say it, but this is a real coup for the Economists’ Voice. Grant and Quiggin on the equity risk premium is an article that any high-end technical journal would have been pleased to have publishedm and the fact that it’s ended up in popular form in this journal is something that the non-economist ordinary business reader ought to be pretty damn pleased with.

By: Matt Weiner

Matt Weiner — Sat, 17 Sep 2005 21:23:55 +0000

Note that "Samuelson" is Paul, not Robert (correct?)