Editing Equity premium puzzle (section)

=== Denial of equity premium ===

{{more citations needed section|date=February 2010}}

A final possible explanation is that there is no puzzle to explain: that there is no equity premium.{{citation needed|date=May 2013}} This can be argued from a number of ways, all of them being different forms of the argument that we don't have enough [[statistical power]] to distinguish the equity premium from zero:
* [[Selection bias]] of the US market in studies. The US market was the most successful stock market in the 20th century. Other countries' markets displayed lower long-run returns (but still with positive equity premiums).  Picking the best observation (US) from a sample leads to upwardly biased estimates of the premium.
*[[Survivorship bias]] of exchanges: This refers to the equity holder's fear about an economic crash such as the 1929 stock market crash eventuating, even when the probability of that event occurring is minute.<ref name="Anomalies: The Equity Premium Puzzl">{{cite journal |last1=Siegel |first1=Jeremy J. |last2=Thaler |first2=Richard H. |title=Anomalies: The Equity Premium Puzzle |journal=Journal of Economic Perspectives |date=Winter 1997 |volume=11 |issue=1 |page=191 |doi=10.1257/jep.11.1.191 |jstor=2138259 |url=https://www.jstor.org/stable/2138259 |access-date=1 May 2022}}</ref> The justification here is that over half of the stock exchanges that were operating in early 1900s were discontinued, and the equity risk premium calculated does not account for this.<ref name="Anomalies: The Equity Premium Puzzl"/> As such, the equity risk premium is "calculated for a survivor" such that if returns from these stock exchanges were included in the calculations, there may not have been such a great disparity between returns gleaned from bonds compared to stocks.<ref name="Anomalies: The Equity Premium Puzzl"/> However, this hypothesis cannot be easily proven and Mehra and Prescott (1985) in their studies, included the effect on the equity returns following the Great Depression.<ref name="Anomalies: The Equity Premium Puzzl"/> Although shares lost 80% of their value, comparisons of returns from stocks against bonds showed that even in those periods, significantly higher returns were gained from investing in stocks.<ref name="Anomalies: The Equity Premium Puzzl"/>
*Low number of data points: the period 1900–2005 provides only 105 years which is not a large enough sample size to run statistical analyses with full confidence, especially in view of the [[Black swan theory|black swan]] effect.
*Windowing: returns of equities (and relative returns) vary greatly depending on which points are included. Using data starting from the top of the market in 1929 or starting from the bottom of the market in 1932 (leading to estimates of equity premium of 1% lower per year), or ending at the top in 2000 (vs. bottom in 2002) or top in 2007 (vs. bottom in 2009 or beyond) completely change the overall conclusion.  However, in all windows considered, the equity premium is always greater than zero.
A related criticism is that the apparent equity premium is an artifact of observing [[stock market bubble]]s in progress.
*[[David C. Blitz|David Blitz]], head of Quant Research at Robeco, suggested that the size of the equity premium is not as large as widely believed. It is usually calculated, he said, on the presumption that the true risk-free asset is the one month T bill. If one recalculates, taking the five-year T-bond as the risk free asset, the equity premium is smaller and the risk-return relation becomes more positive.<ref>{{Cite SSRN |last=Blitz|first=David|date=2019|title=The Risk-Free Asset Implied by the Market: Medium-Term Bonds instead of Short-Term Bills |ssrn=3529110}}</ref>

Note however that most mainstream economists agree that the evidence shows substantial statistical power. Benartzi & Thaler analyzed the equity returns over a 200-year period, between 1802 and 1990 and found that whilst equity returns were remained stable between 5.5% and 6.5%, return on government bonds fell significantly from around 5% to 0.5%.<ref>{{cite journal |last1=Benartzi |first1=Shlomo |last2=H. Thaler |first2=Richard |title=Myopic Loss Aversion and The Equity Premium Puzzle |journal=The Quarterly Journal of Economics |date=February 1995 |volume=110 |issue=1 |page=73 |doi=10.2307/2118511 |jstor=2118511 |s2cid=55030273 |url=https://www.jstor.org/stable/2118511 |access-date=1 May 2022}}</ref> Moreover, analysis of how faculty members funded their retirement showed that people who had invested in stocks received much higher returns than people who had invested in government bonds.<ref name="Myopic Loss Aversion and the Equity"/>