Description

This study describes the different methodologies to measure the equity risk premium (ERP) and, in specific, the ERP for Chile between January 1993 and May 2010. The first one was estimate the historical difference in annual returns of stocks over bonds, which gave an ERP in the range of 2.8% and 6.7%, depending on the choice of the stock index and risk free security. On the other hand, and as an alternative to the first methodology, calculated the return on stocks based on current equity prices using a dividend discount model, which resulted in an ERP in a range of 4.9% to 7.2%, depending on the type of risk free security considered. Finally, the authors added Chilean sovereign risk to the base premium for matured equity markets, obtaining an ERP between 3.7%