The structural break in the equity premium

Chang Jin Kim, James C. Morley, Charles R. Nelson

Research output: Contribution to journalArticlepeer-review

43 Citations (Scopus)


This article uses Bayesian marginal likelihood analysis to compare univariate models of the stock return behavior and test for structural breaks in the equity premium. The analysis favors a model that relates the equity premium to Markov-switching changes in the level of market volatility and accommodates volatility feedback. For this model, there is evidence of a one-time structural break in the equity premium in the 1940s, with no evidence of additional breaks in the postwar period. The break in the 1940s corresponds to a permanent reduction in the general level of stock market volatility. Meanwhile, there appears to be no change in the underlying risk preferences relating the equity premium to market volatility. The estimated unconditional equity premium drops from an annualized 12% before to the break to 9% after the break.

Original languageEnglish
Pages (from-to)181-191
Number of pages11
JournalJournal of Business and Economic Statistics
Issue number2
Publication statusPublished - 2005 Apr


  • Bayes factor
  • Equity premium
  • Marginal likelihood
  • Markov switching
  • Structural break
  • Volatility feedback

ASJC Scopus subject areas

  • Statistics and Probability
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


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