various data sets used in the literature,going back to 1802.The average annual real return,(the inflation adjusted return)on the U.S.stock market over the last 110 years has been about 8.06 percent.Over the same period,the return on a relatively riskless security was a paltry 1.14 per- cent.The difference between these two returns,the"equity premium,"was 6.92 percent. Furthermore,this pattern of excess returns to equity holdings is not unique to the U.S.but is observed in every country with a significant capital market.The U.S.together with the U.K., Japan,Germany and France accounts for more than 85 percent of the capitalized global equity value. The annual return on the British stock market was 5.7 percent over the post war period, an impressive 4.6 percent premium over the average bond return of 1.1 percent.Similar statisti- cal differentials are documented for France,Germany and Japan.Table 2 illustrates the equity premium in the post war period for these countries. Table 1 U.S.Equity Premium Using Different Data Sets Data Set real return on a real return on a relatively equity pre- market index riskless security mium Mean Mean Mean 1802-1998 7.0 2.9 4.1 (Siegel) 1871-199 6.99 1.74 5.75 (Shiller) 1889-2000 8.06 1.14 6.92 (Mehra-Prescott) 1926-2000 8.8 0.4 8.4 (Ibbotson)7 various data sets used in the literature, going back to 1802. The average annual real return, (the inflation adjusted return) on the U.S. stock market over the last 110 years has been about 8.06 percent. Over the same period, the return on a relatively riskless security was a paltry 1.14 per￾cent. The difference between these two returns, the “equity premium,” was 6.92 percent. Furthermore, this pattern of excess returns to equity holdings is not unique to the U.S. but is observed in every country with a significant capital market. The U.S. together with the U.K., Japan, Germany and France accounts for more than 85 percent of the capitalized global equity value. The annual return on the British stock market was 5.7 percent over the post war period, an impressive 4.6 percent premium over the average bond return of 1.1 percent. Similar statisti￾cal differentials are documented for France, Germany and Japan. Table 2 illustrates the equity premium in the post war period for these countries. Table 1 U.S. Equity Premium Using Different Data Sets Data Set % real return on a market index % real return on a relatively riskless security % equity pre￾mium Mean Mean Mean 1802-1998 (Siegel) 7.0 2.9 4.1 1871-199 (Shiller) 6.99 1.74 5.75 1889-2000 (Mehra-Prescott) 8.06 1.14 6.92 1926-2000 (Ibbotson) 8.8 0.4 8.4