We estimate the equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. Our estimates for 1951-2000, 2.55% and 4.32%, are much lower than the equity premium produced by the average stock return, 7.43%. Our evidence suggests that the high average return for 1951-2000 is due to a decline in discount rates that produces large unexpected capital gains. Our main conclusion is that the stock return of the last half-century is a lot higher than expected.
Fama, Eugene F. and French, Kenneth R., The Equity Premium (April 2001). EFMA 2001 Lugano Meetings; CRSP Working Paper No. 522.
Source: http://ssrn.com/abstract=236590
