The Equity Premium


  • Eugene F. Fama,

  • Kenneth R. French

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    • Fama is from the University of Chicago and French is from Dartmouth College. The comments of John Campbell, John Cochrane, Kent Daniel, John Heaton, Jay Ritter, Andrei Shleifer, Rex Sinquefield, Tuomo Vuolteenaho, Paul Zarowin, and seminar participants at Boston College, Dartmouth College, the NBER, Purdue University, the University of Chicago, and Washington University have been helpful. Richard Green (the editor) and the two referees get special thanks.


We estimate the equity premium using dividend and earnings growth rates to measure the expected rate of capital gain. Our estimates for 1951 to 2000, 2.55 percent and 4.32 percent, are much lower than the equity premium produced by the average stock return, 7.43 percent. Our evidence suggests that the high average return for 1951 to 2000 is due to a decline in discount rates that produces a large unexpected capital gain. Our main conclusion is that the average stock return of the last half-century is a lot higher than expected.