Survey_WG_2008

Abstract

Our dependent variable is always the equity premium, that is, the total rate of return on the stock market minus the prevailing short-term interest rate. We use S&P 500 index returns from 1926 to 2005 from Center for Research in Security Press (CRSP) month-end values. Stock returns are the continuously compounded returns on the S&P 500 index, including dividends. For yearly and longer data frequencies, we can go back as far as 1871, using data from Robert Shiller's website. For monthly frequency, we can only begin in the CRSP period, that is, 1927. he risk-free rate from 1920 to 2005 is the Treasury-bill rate. Because there was no risk-free short-term debt prior to the 1920s, we had to estimate it. Commercial paper rates for New York City are from the National Bureau of Economic Research (NBER) Macrohistory data base. These are available from 1871 to 1970. We estimated a regression from 1920 to 1971, which yielded Treasury?billrate=?0.004+0.886×CommercialPaperRate, Dividends are 12-month moving sums of dividends paid on the S&P 500 index. The data are from Robert Shiller's website from 1871 to 1987. Dividends from 1988 to 2005 are from the S&P Corporation. The Dividend Price Ratio (d/p) is the difference between the log of dividends and the log of prices. The Dividend Yield (d/y) is the difference between the log of dividends and the log of lagged prices. Earnings are 12-month moving sums of earnings on the S&P 500 index. The data are again from Robert Shiller's website from 1871 to 1987. Earnings from 1988 to 2005 are our own estimates based on interpolation of quarterly earnings provided by the S&P Corporation. The Earnings Price Ratio (e/p) is the difference between the log of earnings and the log of prices. Stock Variance is computed as sum of squared daily returns on the S&P 500. G. William Schwert provided daily returns from 1871 to 1926, data from 1926 to 2005 are from CRSP. The cross-sectional beta premium measures the relative valuations of high- and low-beta stocks and is proposed in Polk, Thompson, and Vuolteenaho (2006). The csp data are from Samuel Thompson from May 1937 to December 2002. Book values from 1920 to 2005 are from Value Line's website, specifically their Long-Term Perspective Chart of the Dow Jones Industrial Average. The Book-to-Market Ratio (b/m) is the ratio of book value to market value for the Dow Jones Industrial Average. For the months from March to December, this is computed by dividing book value at the end of the previous year by the price at the end of the current month. For the months of January and February, this is computed by dividing book value at the end of two years ago by the price at the end of the current month. with an R2 of 95.7%. Therefore, we instrumented the risk free rate from 1871 to 1919 with the predicted regression equation. The correlation for the period 1920 to 1971 between the equity premium computed using the actual Treasury-bill rate and that computed using the predicted Treasury-bill rate (using the commercial paper rate) is 99.8%.