What is the equity risk premium?
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Direct answer
The equity risk premium (ERP) is the excess return investors expect from holding equities over a risk-free asset (typically 10-year Treasury). It's the most-quoted input in valuation models — every DCF, WACC, and CAPM calculation uses one. Three approaches: HISTORICAL ERP (realized mean ~5-6% since 1928), SURVEY ERP (analyst expectations, currently ~4-5%), and IMPLIED ERP (Damodaran's S&P-DCF method, currently ~4-5%). They're measuring different things and they disagree often.
Why this question matters
If you're valuing a company via DCF, calculating WACC, building a CAPM beta-pricing model, or doing asset allocation work, you need an ERP. The 1-percentage-point gap between using 4% vs 5% ERP changes a DCF terminal value by ~25% — small input, big consequence. The textbook answer for decades was "use the historical realized equity-bond spread, ~5-6%, since 1928." That assumes the historical period is representative of future expected returns, which Damodaran has spent 30+ years arguing is methodologically wrong — future expected returns should be solved FROM current market prices, not assumed FROM past realizations. Damodaran's "implied ERP" methodology — S&P 500 DCF backed out from current price + forecast earnings + payout ratio — is the academic standard for forward-looking ERP and is updated monthly at NYU Stern. Tidore's reference vertical positioning: take Damodaran's methodology and apply it WEEKLY using Philly Fed SPF (Survey of Professional Forecasters) as the analyst-growth proxy. Higher cadence than monthly without claiming any methodology improvement on the canonical work.
Historical ERP vs Implied ERP — side-by-side
| Dimension | Historical ERP | Implied ERP | Note |
|---|---|---|---|
| Definition | Realized excess return of equities over risk-free rate, averaged over a historical window | Forward expected excess return implied by current market prices + earnings forecasts | Backward-looking vs forward-looking — fundamentally different questions |
| Typical current value (US, mid-2020s) | ~5.0-6.0% (1928-2024 arithmetic mean over 10y Treasury) | ~4.0-5.5% (Damodaran monthly update, varies) | They typically run ~50-150bps apart |
| Source data | Historical S&P 500 total return - Treasury return | Current S&P 500 price + forward earnings + payout ratio + risk-free rate | Historical needs decades of data; implied needs current snapshot |
| Update frequency | Annual (typical practitioner) or monthly (Damodaran updates) | Monthly (Damodaran NYU Stern); weekly (Tidore reference vertical, in development) | Cadence is the Tidore wedge — same methodology, higher frequency |
| Methodology source | Ibbotson / Damodaran historical tables; CFA Institute textbook | Damodaran S&P-DCF; ARP-style implied-cost-of-capital papers | Both are academically established; implied is more recent (1990s onward) |
| Sensitivity to current conditions | Low — moves slowly as new annual data point added | High — moves with every change in S&P price or earnings forecast | Implied is volatile by design; historical is stable by construction |
| Best for | Long-term strategic allocation, century-view modeling | Current-period DCF valuation, WACC for next investment decision | Practitioners often use both as sanity checks against each other |
| Geographic scope | US-heavy (best long history); other DM markets have shorter clean series | Computable for any market with public-equity index + analyst forecasts | Damodaran publishes implied ERP for ~190 countries |
| Survey ERP (third approach) | Analyst / CFO / academic expectations (Welch survey, Duke CFO survey) | — | Survey ERP currently runs ~4-5%; converges roughly with implied |
| Common errors | Geometric vs arithmetic mean choice (geometric understates for compounding); start-date sensitivity (1928 vs post-1945) | Forecast-source choice (analyst growth vs SPF vs trailing); payout-ratio assumption | Damodaran documents both pitfalls extensively |
| Country risk premium adjustment | Add country sovereign spread × equity-vol-to-bond-vol ratio (Damodaran method) | Use the country-specific implied ERP directly | Tidore reference vertical ships CRP/iCRP for ~190 countries (re-anchored 2026-05-07) |
Numbers worth remembering
- US historical ERP (1928-2024 arithmetic mean of S&P 500 total return minus 10-year Treasury return) is ~5.5-6.0% depending on end-date.
- Damodaran's implied ERP for the US has ranged ~3-7% over 2000-2024, with most observations in the 4-5.5% band.
- A 1-percentage-point change in ERP shifts a terminal-value DCF estimate by approximately 20-30% depending on growth rate + payout assumptions.
- Damodaran updates implied ERP monthly at NYU Stern; the spreadsheet is free + publicly downloadable.
- The Welch (academic) and Duke CFO surveys both put survey-ERP in the 3.5-5% range over the 2020s — closer to implied than historical.
- Country risk premium (CRP) for emerging markets adds 100-1500bps on top of mature-market ERP depending on sovereign credit rating per Damodaran's methodology.
How to pull this data
Tidore's reference vertical positioning is to apply Damodaran's implied-ERP methodology weekly (vs his monthly cadence) using Philly Fed SPF as the analyst-growth proxy. Until the reference vertical ships, Damodaran's monthly spreadsheet is the canonical source.
# Tidore reference vertical (in development, design-locked 2026-05-11)
curl -H "Authorization: Bearer $TIDORE_API_KEY" \
"https://api.tidore.co/v1/reference/erp?country=us&method=implied"
curl -H "Authorization: Bearer $TIDORE_API_KEY" \
"https://api.tidore.co/v1/reference/crp?country=BR" # Brazil country risk premium
# Today — Damodaran NYU Stern monthly spreadsheet (free download)
# https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/implprem.htmlAuthoritative sources
- Damodaran NYU Stern — Implied ERP monthly spreadsheet (canonical primary source)
- Damodaran NYU Stern — Country risk premium tables (~190 countries)
- Damodaran — "Equity Risk Premiums: Determinants, Estimation and Implications" (annual updated whitepaper)
- Ivo Welch — Academic ERP survey (multi-decade research)
- Duke CFO Global Business Outlook Survey (quarterly survey-ERP)
Frequently asked questions
What ERP should I use in a DCF?
No single correct answer — depends on your modeling philosophy. Most current-period DCFs use implied ERP (Damodaran's latest monthly update or your own internal compute) because it reflects current market pricing. Most long-term strategic-allocation work uses a smoothed historical ERP because it's less volatile across cycles. A common practitioner approach: use implied ERP as the primary input, sanity-check against historical mean ± 1 standard deviation.
Why does Damodaran say historical ERP is methodologically wrong?
His argument: historical ERP assumes the future expected return equals the past realized return, which builds in an arithmetic-mean bias and an unjustified extrapolation. If equity prices rose during the historical window because the ERP fell (multiple expansion), the historical realized return OVERSTATES the forward-looking expected return. Implied ERP solves this by backing out the current market's forward-looking expected return from current price + forecast earnings + payout assumptions.
How is country risk premium related to ERP?
Country risk premium (CRP) is the additional ERP demanded for investing in a specific country relative to a "mature market" benchmark (typically the US). Damodaran's methodology: take the sovereign credit spread (default-spread proxy from S&P / Moody's ratings), then scale by the equity-volatility-to-bond-volatility ratio. CRP plus the mature-market ERP gives the country-specific ERP. Tidore's reference vertical ships CRP for ~190 countries based on this method.
What is implied ERP and how is it different from historical ERP?
Implied ERP is solved FROM current market prices: take the current S&P 500 price, take forward earnings + dividend forecasts + payout ratio, plug into a multi-stage DCF, solve for the required return on equity that makes the present-value equation balance. Subtract the current risk-free rate (10-year Treasury) — what remains IS the implied ERP. It's forward-looking by construction. Historical ERP is the realized average of equity-minus-bond returns over a backward-looking window; it's backward-looking by construction.
What does Tidore's reference vertical add to Damodaran's monthly ERP?
Cadence, not methodology. Tidore's reference vertical (design-locked 2026-05-11, in development) applies Damodaran's implied-ERP methodology WEEKLY using Philly Fed SPF (Survey of Professional Forecasters) as the analyst-growth proxy. The positioning is explicitly "his methodology, applied weekly" — never "more accurate." For most practitioners the monthly update is fine; for trading-desk + risk-management workflows that need fresher forward-looking ERP, weekly is the wedge.
Is Damodaran's ERP free?
Yes — his data files at NYU Stern are free + publicly downloadable, including the implied-ERP spreadsheet (monthly), country risk premium tables (~190 countries), tax rates, sector betas, multiples. The whole apparatus is academic + open-access. Tidore's reference vertical bundles these into API endpoints with consistent JSON schema and the weekly iERP cadence — the same data, accessible programmatically instead of via Excel.