Abstract:
This paper investigates whether Siegel’s (1992) methodology is valid for the New Zealand market. Using historical returns of New Zealand equities and bonds from 1931 to 2002, the standard and tax-adjusted market risk premium in the capital asset pricing model is estimated and compared to the estimates of those using the method in Ibbotson and Sinquefield (1976) and the forward-looking estimates. Overall, this paper provides evidence to support Siegel-type estimates of the market risk premium, arguing that unexpected inflation and the NZ interest rate controls during 1972-1984 reduced the average real bond yields lower than expected. This suggests that such factors induce an upward bias estimate of the market risk premium when using an Ibbotson-type or forward-looking method for the NZ premium.