The equity premium and structural breaks

A long return history is useful in estimating the current equity premium ev en if the historical distribution has experienced structural breaks. The lo ng series helps not only if the timing of breaks is uncertain but also if o ne believes that large shifts in the premium are unlikely or that the premi um is associated, in part, with volatility. Our framework incorporates thes e features along with a belief that prices are likely to move opposite to c ontemporaneous shifts in the premium. The estimated premium since 1834 fluc tuates between 4 and 6 percent and exhibits its sharpest drop in the last d ecade.