Professor Aswath Damodaran (Stern School of Business, New York) has recently posted a new 74-page article titled Equity Risk Premiums (ERP): Determinants, Estimation and Implications (the article appears as item number one under Research/Papers on his website). In it, he investigates:
the three basic approaches used to estimate equity risk premiums – the survey approach, where investors or managers are asked to provide estimates of the equity risk premium for the future, the historical return approach, where the premium is based upon how well equities have done in the past and the implied approach, where we use future cash flows or observed bond default spreads to estimate the current equity risk premium.
He also considers two questions: “why the numbers vary across approaches and…how to choose the ‘right’ number to use in analysis.” Readers may also be interested to see A Survey Paper on Valuation listed as item four under Research/Papers—and that he’s working on the second edition of The Dark Side of Valuation due out at the end of the year.
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