BY: WILLIAM N. GOETZMANN
Yale School of Management
PHILIPPE JORION
University of California, Irvine
Date: December 1996
Contact: Philippe Jorion
E-Mail: MAILTO:PJORION@UCI.EDU
Postal: University of California, Irvine, CA 92697
Phone: Not Available
Fax: Not Available
Co-Auth: MAILTO:will@horus.som.yale.edu
ERN Ref: INT/FIN:WPS97-116
The expected return on equity capital is possibly the most
important driving factor in asset allocation decisions. Yet,
the long-term estimates we typically use are derived from
U.S. data only. There are reasons to suspect, however, that
these estimates of return on capital are subject to
survivorship, as the United States is arguably the most
successful capitalist system in the world; most other
countries have been plagued by political upheaval, war, and
financial crises. The purpose of this paper is to provide
estimates of return on capital from long-term histories for
world equity markets. By putting together a variety of
sources, we collected a database of capital appreciation
indexes for 39 markets with histories going as far back as
the 1920s. Our results are striking. We find that the United
States has by far the highest uninterrupted real rate of
appreciation of all countries, at about 5 percent annually.
For other countries, the median real appreciation rate is
about 1.5 percent. The high return premium obtained for U.S.
equities therefore appears to be the exception rather than
the rule. Our global databases also allow us to reconstruct
monthly real and dollar-valued capital appreciation indices
for global markets, providing further evidence on the
benefits of international diversification.
JEL Classification: F21, G15