Overview
Equity risk premia are horizon-specific compensation for uncertain cash flows, not one universal rate. The series distinguishes whole-stream dividend-discount averages from horizon-specific estimates, then compares a preliminary 2026 New York Fed cross-sectional DCF study with a 2009 ECB affine stock–bond model. Together they show why aggregate premia may slope upward, flatten in bad times, or differ across firms and states, while remaining conditional on forecasts, samples, benchmarks, weighting, and model restrictions.
Learning outcomes
- A single dividend-discount rate prices a whole expected cash-flow stream on average; it does not reveal compensation at each horizon.
- The preliminary 2026 New York Fed report finds an upward-sloping aggregate curve that flattens in bad times, while value and speculative-grade firms can be flatter or inverted.
- The 2009 ECB model makes premia conditional on a shared bond–stock pricing kernel, while unconditional expected stock returns are flat across horizons.
- Horizon-matched benchmarks and explicit conditioning are essential because forecasts, samples, weighting, and model restrictions shape the inferred curve.
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PlansFAQ
Why does the equity risk premium have a term structure?
Because equity value comes from cash flows arriving at different dates, and each horizon can carry different required compensation relative to a matching risk-free rate.
Is a dividend-discount rate the same as a term-structure premium?
No. A dividend-discount rate is one average rate that prices an entire expected stream, while a term structure assigns compensation across payment horizons.
How can researchers estimate premia at several horizons?
They can use cross-firm differences in expected cash-flow timing and prices, or a structural pricing kernel that jointly models stocks, bonds, and economic states.
Does an upward-sloping aggregate curve apply to every firm or market state?
No. The preliminary 2026 New York Fed estimates find flatter or inverted curves for some value and speculative-grade firms, while the ECB model allows the conditional shape to change with the state.