The UK Equity Premium: 1901–2004


  • He thanks John Doukas, Krishna Paudyal, Andrew Stark (editor), an anonymous referee, seminar participants at the University of Durham and the MMF Conference 2005 and especially Tony Antoniou and Robert Sollis for many helpful comments. He also thanks Barclays Capital for assistance with the main data sample and Steve Young for providing aggregate share repurchase data. All remaining errors or omissions are the author's own.

* Address for correspondence: Andrew Vivian, School of Economics and Finance, University of St. Andrews, Castlecliffe, The Scores, St. Andrews KY16 9AL, UK.


Abstract:  This paper examines the UK equity premium over more than a century using dividend growth to estimate expectations of capital gains employing the approach of Fama and French (2002). Over recent decades estimated equity premia implied by dividend growth have been much lower than that produced by average stock returns for the UK market as a whole; a finding corroborated by all economic sub-sectors. The empirical analysis suggests this is primarily due to a declining discount rate, during the latter part of the 20th century, which would rationally stimulate unanticipated equity price rises during this period. Thus, I conclude that historical stock returns over recent decades have been above investors' expectations.