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Aswath Damodaran Profile picture
@AswathDamodaran
Apr 23, 2021 • 6 tweets • 4 min read • Read on X
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The equity risk premium (ERP) is the price of risk in equity markets, the receptacle for all our fears. Each year, since 2008, I have updated a paper that includes everything I know about ERP. (Warning: It is 130 pages long...) Here is the 2021 version: bit.ly/2QQd3bB Image
As the ERP rises and falls, it drives what investors are willing to pay for stocks, and what companies demand as hurdle rates. Views on whether it is too high or too low determine whether stocks are collectively under or over valued. bit.ly/2QQd3bB Image
In practice, most analysts and companies estimate equity risk premiums by looking at the past (historical data), but that is not only backward looking, but it yields static and noisy estimates of the ERP, even for a market like the US, with a long history. bit.ly/2QQd3bB Image
An implied ERP, computed from current stock prices and expected future cash flows, is a more forward-looking and dynamic estimate. At the start of 2021, this ERP was 4.72% after a tumultuous ride during 2020. bit.ly/2QQd3bB Image
The price of risk (ERP) in equity markets moves mostly in sync with the price of risk in bond markets (default spreads) and when it does not (late 1990s, 2002-08), chaos ensues. Real estate is behaving more like stocks now than a divergent asset class. bit.ly/2QQd3bB Image
Comparing the power of different measures of ERP to predict stock market returns over next decade, the current implied ERP does best (albeit with noise) and that historical ERPs do worst. (Look at correlations with actual 10-yr ERPs) bit.ly/2QQd3bB Image

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More from @AswathDamodaran

Aswath Damodaran Profile picture
Mar 4
I have issues with Citrini's AI doomsday scenario, where massive and speedy AI disruption causes economic damage, but it rendered a service by playing through what AI success will mean for the rest of the economy. bit.ly/4rMUhy9
As you assess the competing AI scenarios, it is important that you classify them on where they fall in the likelihood scale - my continuum goes from possible (the weakest) to plausible to probable. bit.ly/4rMUhy9Image
All AI scenarios start with views of the magnitude of AI disruption (from job displacement today to productivity tools for workers) and the speed of disruption (imminent versus take time), and the net benefits of AI will vary depending on the choices. bit.ly/4rMUhy9Image
Read 7 tweets
Aswath Damodaran Profile picture
Feb 25
In my 8th data update for 2026, I look at the dividend decision, where businesses decided how much cash to return to shareholders and in what form (dividends or buybacks) in 2025, and argue that there dividend dysfunction is the norm. bit.ly/4bap5D2
I start by looking at dividends as a residual cash flow, and how they would set in a world where businesses make investment and financing decisions first (and sensibly) before deciding how much cash to return to shareholders. bit.ly/4bap5D2Image
In practice, much of dividend policy at businesses can be explained by inertia (where you stick with the dividends you paid last year) and me-tooism (where you stay close to the peer group). bit.ly/4bap5D2
Read 21 tweets
Aswath Damodaran Profile picture
Feb 21
In my seventh data update, I look at the choice between borrowed money (debt) and owner funds (equity) that every business has to make, and how those choices played out in 2025, with a callout to the AI cap ex ramp up and private financing along the way. bit.ly/3ZO6Eha
I start with a differentiation of debt and equity that is built around the nature and priority of claims, but moves on to differences in tax treatment and role in management. bit.ly/3ZO6EhaImage
There are illusory reasons for borrowing money (it is cheaper, it increases and ROE) or for not borrowing at all (will lower net income, lower bond ratings), but that does not stop businesses from using them. bit.ly/3ZO6EhaImage
Read 16 tweets
Aswath Damodaran Profile picture
Jan 28
In 2025, there were multiple news stories (tariffs, US government ratings downgrade, US government shutdown and Fed independence) that depleted trust in US institutions, and I look at how that played out in bond, currency, precious metal & crypto markets. bit.ly/4q3y6SC
The bond market, where buyers are trusting governments not to default and to protect buying power (by controlling inflation), took the "loss of trust" new stories in stride, with US treasuries flat (20 & 30 yr) or lower (10 yr & below) for the year. bit.ly/4q3y6SCImage
One reason for rates not moving may be that the Moody's downgrade was not news to the market, which had already priced in that expectation, given that S&P (2011) and Fitch (2023) had downgraded earlier. The sovereign CDS spread for the US dropped in 2025. bit.ly/4q3y6SCImage
Read 13 tweets
Aswath Damodaran Profile picture
Jan 10
It is the end of the first full week of 2026, and as has been my practice every year for the last 33 years, I have updated the data on my webpage, reflecting the 2025 financial filings of publicly traded firms and updated market information. bit.ly/3YtTCVx
My data universe includes 48,516 publicly traded companies, listed across global markets, and my datasets include global numbers as well as for sub-groups. bit.ly/3YtTCVxImage
I report on the industry averages on a range of variables (about 200 in all), reflecting data that I use in corporate financial, valuation and investing analysis, striving for consistency and transparency. bit.ly/3YtTCVxImage
Read 6 tweets
Aswath Damodaran Profile picture
Dec 5, 2025
I am on sabbatical this academic year, and while I will not be teaching my corporate finance & valuation classes at NYU in Spring 2026, the full versions of my Spring 2025 classes, with lectures, class material and tests/exams are accessible online. bit.ly/3Y87KDx
NYU offers certificate versions of my valuation, corporate finance and investment philosophy classes, with valuation in both fall and spring, corporate finance in the fall and investment philosophies in the spring. execed.stern.nyu.edu/collections/ta…
If the NYU price tag is off-putting or budget-busting, I offer free versions of all three of these classes, as well as four others, with recorded lectures and supporting material. Since they are free, they come with a money-back guarantee. bit.ly/3XFnMoj
Read 7 tweets

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