What is the expected return on the market?

Publication Date
Financial Markets Group Discussion Papers DP 750
Publication Date
Paul Woolley Centre Discussion Papers No 50
Publication Authors

This paper presents a new lower bound on the equity premium in terms of a volatility index, SVIX, that can be calculated from index option prices. This bound, which relies only on very weak assumptions, implies that the equity premium is extremely volatile, and that it rose above 20% at the height of the crisis in 2008. More aggressively, I argue that the lower bound—whose time-series average is about 5%—is approximately tight and that the high equity premia available at times of stress largely reflect high expected returns over the very short run.