Study reveals declining equity premium signals end of high returns era.
The researchers studied changes in the equity premium over time by analyzing factors like dividend growth and consumption growth. They found that the equity premium has decreased, especially during certain periods in history. This decline suggests that high stock returns in the past were due to a high equity premium. The researchers also discovered that changes in consumption volatility play a significant role in driving the equity premium. Essentially, fluctuations in economic uncertainty impact expected returns in the stock market.