Friday, March 13, 2015

Is The High Equity Risk Premium (ERP) Due To Low Yields Or High Cash Flow?

Summary

  • A staff report was recently published by the Federal Reserve Bank of New York entitled "The Equity Risk Premium: A Review of Models".
  • The authors combined information from twenty ERP models and found that the ERP has reached high levels in recent years.
  • The paper explores whether or not the ERP is high due to low discount rates or high cash flow.
  • Ultimately, the authors conclude that the current ERP is due to lower yields not higher earnings or cash flow. In other words, this is not a bullish signal. 
Read the full article here.