Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach - 2% a year

Whycliffes · March 22, 2024, 5:27am

This may be an argument for global deverification

For the United States, the realized rate of return exceeds the expected rate of return by 2%, which can be interpreted as the amount the historical equity premium has been overstated by.

AI - Summary:

Here are the key findings of the study:

The researchers quantify the extent of survivorship bias in the performance of the US equity market and find that it explains about one-third of the equity risk premium in the past century 1 2.
The difference between the realized and expected excess return can be attributed to luck and learning 1.
The researchers model the subjective crash belief of an investor who infers the crash risk in the US by cross-learning from other countries 1 2.
The crash belief in the US shows a persistent and widening divergence from the implied global average 1 2.
Consistent with the model, they also document that a global CAPM fits well the cross-section of country average returns 1.

This contributes to the understanding of how survivorship bias can influence the interpretation of historical returns and risk premium in the equity market.