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The "Equity Risk Premium" refers to the excess return on stocks above fixed income assets, a concept that plays a central role in calculating the cost of capital and portfolio allocation. In this volume, Goetzmann and Ibbotson have compiled a wonderful collection of 23 articles which they either singly or jointly co-authored, examining the equity premium's historical values, its stability over time, and its use in forecasting future returns. This volume includes Ibbotson's classic article which has carefully calculated financial market returns from 1926; these data, updated yearly since 1983, have rightly become the benchmark for both academic and professional researchers. The Ibbotson data have established that the US real annual compound return on equities averaged between 6% and 7% per year.
Building on the Ibbotson data, I have extended the data back to the beginning of the 19th century by appending data from Alfred Cowles who computed stock returns back to 1872 and adding an estimate of the dividend yield to the earlier price returns from William Schwert (1990). My 1992 piece found a striking similarity in real equity returns in the 19th and 20th centuries. Goetzmann/Ibbotson and colleague Liang Peng then undertook an even more exhaustive study of the pre-1926 stock data in 2001, and their results confirm my findings that the average nominal compound equity return of 8% in the 1815 to 1925 data compares to a return of about 11% in the post-1925 period (when inflation was about 3 percentage points higher). In their introductory essay in this volume, the authors note that "through that trajectory of time, the US went from being an emerging market, to a capitalist importer to a capital exporter. Given what would seem to be major regime...