Can Sweden Afford Another High Equity Premium?

Authors

Matthew K. Miller, University of Illinois at Urbana-ChampaignFollow

Abstract

This paper calculates the empirical equity premium in Sweden between 1919-2006 and disaster probabilities of 25% and 50% contractions in real Gross Domestic Product. The calculation puts the equity premium at approximately 8%, 2% higher than what appears in the historical United States data, due to rare disaster events outside and idiosyncratic to Sweden. This study makes two important contributions. First, it projects that Sweden can afford the economic cost of another high equity premium but should remain cautious. Second, this paper affirms that WWII increased investors' perceptions of future equity risk despite Sweden's neutrality. To arrive at the empirical results this paper follows a distilled version of Barro (2006) written by Taub (2007). The results stemming from this analysis help inform macroeconomic policy in Sweden.

Recommended Citation

Miller, Matthew K. (2010) "Can Sweden Afford Another High Equity Premium?," Undergraduate Economic Review: Vol. 6: Iss. 1, Article 3.
Available at: https://digitalcommons.iwu.edu/uer/vol6/iss1/3