Predictability of equity risk premium in Indian equity markets

Abstract

We show that the historical mean of the equity risk premium is consistently a more accurate outof-sample predictor of future equity risk premium in Indian equity markets. Under certain variations of the in-sample period length, dividend payout and the mean combination forecast have better predictive power than the historical mean equity risk premium. Finally, we find that predictions based on more recent information are, on average, more accurate than those based on the entire history of observations. We estimate that the (geometric) average annual equity risk premium of NIFTY 500 index for the period June 2000 to March 2018 is 7.78%1 .