Equity Risk Premium drivers and estimation methods: The Grinold-Kroner Model.

The equity risk premium has always played a critical role in the financial market; it affects savings and spending behaviour of the participants and it influences the allocation judgements between riskless and risky assets. The work begins to examine the economic drivers effecting this important factor and the required return estimation models which use ERP in their formulations. Then, the analysis will look at the different approaches to estimate ERP, focusing, in particular, on the supply-side model presented by Grinold and Kroner. This approach measures how much cash flow firms in the economy can supply to the market and it computes the return on equity as the sum of three main components: income return, earning growth and repricing. We have investigated on the historical paths of each of these components and then we have computed the 10-years forward Equity Risk Premia expectation at current day and for the past seventy years.

Il premio per il rischio è una misura del rischio nel mercato dell'equity. E' una componente cruciale nei modelli di stima del costo del capitale, come anche in finanza aziendale e gestione del portafoglio. Questo paper comincia con l'analizzare le determinanti economiche che influenzano l'equity risk premium e i modelli di stime del ritorno atteso che lo utilizzano. Investigherà poi sui diversi approcci per calcolarlo, focalizzando l’attenzione sui più recenti modelli supply-side.