Tying up our two-part series on premiums, today we’ll explore the equity premium.
Claude Erb has done a series of papers in which he examines the various premiums – size, value, momentum, and beta – and found that there’s a demonstrable trend in each case of the premiums shrinking in terms of realized returns. His April 2014 paper, “The Incredible Shrinking Realized Equity Risk Premium,” focused specifically on the equity risk premium.
To create a trend line Erb used a three-step process:
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