Equity Risk Premium Model

    Latest Update: December 1, 2018 
    Model Summary: This model uses the Fed Funds rate, 10 year U.S. Treasury rate, implied volatility, equity market expectations, and the Constant Sharpe Approach to estimate the Equity Risk Premium (ERP), which is in conjunction with the Capital Asset Pricing Model (CAPM) to calculate the required return on equity for our DCF-based share valuation models.​
    Current ERP Estimate for 4Q2018: 5.4%
    Current Required Return on Equity Estimate for 4Q2018: 8.4% (assuming a beta of 1)
ERP Model.xlsx
File Size: 1703 kb
File Type: xlsx
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Last Updated: February 22, 2017
2017 ERP Estimate: 5.0%
​Model Up Votes-to-Total Votes: 70%
Summary of Model Estimates: In general I have a bullish outlook on the market for 2017 based on the following:
  • Trump's expected business deregulation initiatives and corporate tax reform (including the repatriation tax) could begin soon and may drive an increase in reinvestment in the US Economy. In the long-term, I believe Trump's economic policies will eventually bring some form of financial crisis (possibly with the overvalued stock market as the underlying asset bubble) but as for 2017, I think the market will continue to propel to higher levels. To reflect this view I have incorporated a total return of 18% on the S&P500 into my ERP model. 
  • I believe the positive market conditions will cause interest rates to increase above 3% by the end of the year.
  • The VIX has been fluctuating on the low side this year (between 10-12%) despite some of the President's volatile decisions. I believe volatility will increase later in the year and reach a 12-month trailing average of 15.5%.
  • Based on these assumptions I expect the market's Equity Risk Premium to reach 5% by the end of 2017.
Paul DeAngelis ERP Model.xlsx
File Size: 1066 kb
File Type: xlsx
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