Equity Risk Premiums (ERP): Determinants, Estimation, and Implications – The 2025 Edition

ArXiv ID: ssrn-5168609 “View on arXiv”

Authors: Unknown

Abstract

The equity risk premium is the price of risk in equity markets, and it is not only a key input in estimating costs of equity and capital in both corporate

Keywords: equity risk premium, cost of equity, valuation, corporate finance, risk and return, Equities

Complexity vs Empirical Score

• Math Complexity: 4.0/10
• Empirical Rigor: 6.0/10
• Quadrant: Street Traders
• Why: The paper focuses on practical estimation methods (historical, survey, implied) and uses empirical data from multiple markets, but relies on conceptual frameworks and regression analysis rather than advanced mathematical derivations.

  flowchart TD
    A["Research Goal: Determine 2025 Equity Risk Premium"] --> B["Methodology & Data Inputs"]
    B --> C["Computational Processes"]
    C --> D["Key Findings & Implications"]
    subgraph B ["Methodology & Data Inputs"]
        B1["Historical Market Returns"]
        B2["Inflation & Treasury Yields"]
        B3["Valuation Multiples<br>P/E, Dividend Yields"]
    end
    subgraph C ["Computational Processes"]
        C1["Historical Averages"]
        C2["Build-Up Models<br>ERP = RiskFree + Equity Risk Compensation"]
        C3["Inverse P/E Implied ERP"]
    end
    subgraph D ["Key Findings & Implications"]
        D1["Updated Cost of Equity<br>Estimates"]
        D2["Valuation Adjustments<br>for 2025"]
        D3["Strategic Asset Allocation<br>Guidance"]
    end