It’s not often that a major newspaper tackles one of the most contentious (and important) debates in academic finance. Daniel Altman in the New York Times surveys current thinking on the equity risk premium.
The equity risk premium (ERP) holds a central role in academic finance. The size and changing level of the equity risk premium affects both corporate finance and the capital markets. No one doubts that the modernization of the capital markets has made a diversified investment in equities cheaper and easier.
The Altman article also links the ERP and the state of the economy. When the economy is poor we should expect that it would take a higher risk premium to entice investors into risky assets, and vice versa. As noted the economy of late has not had particularly deep recessions and historically is quite placid. That has lead some to predict a lower ERP for some time to come.
For another take on the Altman article, Barry Ritholtz at the Big Picture weighs in with another explanation for the ERP.