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Historical Equity Premium


A concept of equity premium (EP) that reflects the historical excess return (of equity market) over that of risk-free investment (e.g., risk-free securities such as treasuries). Historical equity premium (HEP) is measured by comparing equity returns with returns of risk-free debt securities for corresponding time intervals.

In calculation, it constitutes the historical average differential return a market portfolio (of equity holdings) over a certain type of risk-free debt. It can be calculated as the difference between the yield on 2, 5 and 10-year government bonds and the stock market return over the corresponding time horizon at regular intervals (weekly and the monthly frequency).

This measure of equity premium does not differ across different types of investors if the same set of market data is used.



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