Presents a comprehensive analysis of investment returns for equities, bonds, bills, currencies and inflation, spanning sixteen countries, from the end of the nineteenth century to the beginning of the twenty-first. This book also provides evidence on the long-term equity risk premium - the reward for bearing the risk of common stocks.

Preface xi Part One: 101 years of global investment returns 1 Chapter 1 Introduction and overview 3 1.1 Need for an international perspective 3 1.2 The historical record 5 1.3 Inside the markets 7 1.4 The equity premium 8 1.5 Sixteen countries, one world 10 Chapter 2 World markets: today and yesterday 11 2.1 The world's stock markets today 11 2.2 The world's bond markets today 14 2.3 Why stock and bond markets matter 18 2.4 The world's markets yesterday 19 2.5 The US and UK stock markets: 1900 versus 2000 23 2.6 Industry composition: 1900 versus 2000 23 2.7 Stock market concentration 28 2.8 Summary 32 Chapter 3 Measuring long-term returns 34 3.1 Good indexes and bad 34 3.2 Index design: a case study 36 3.3 Dividends, coverage, and weightings 38 3.4 Easy-data bias in international indexes 40 3.5 Measuring inflation and fixed-income returns 43 3.6 Summary 44 Chapter 4 International capital market history 45 4.1 The US record 45 4.2 The UK record 48 4.3 Stock market returns around the world 50 4.4 Equities compared with bonds and bills 51 4.5 Investment risk and the distribution of annual returns 54 4.6 Risk, diversification, and market risk 56 4.7 Risk comparisons across asset classes and countries 59 4.8 Summary 61 Chapter 5 Inflation, interest rates, and bill returns 63 5.1 Inflation in the United States and the United Kingdom 63 5.2 Inflation around the world 65 5.3 US treasury bills and real interest rates 68 5.4 Real interest rates around the world 71 5.5 Summary 72 Chapter 6 Bond returns 74 6.1 US and UK bond returns 74 6.2 Bond returns around the world 79 6.3 Bond maturity premia 81 6.4 Inflation-indexed bonds and the real term premium 84 6.5 Corporate bonds and the default risk premium 87 6.6 Summary 89 Chapter 7 Exchange rates and common-currency returns 91 7.1 Long-run exchange rate behavior 91 7.2 The international monetary system 93 7.3 Long-run purchasing power parity 95 7.4 Deviations from purchasing power parity 96 7.5 Volatility of exchange rates 98 7.6 Common-currency returns on bonds and equities 100 7.7 Summary 103 Chapter 8 International investment 105 8.1 Local market versus currency risk 105 8.2 A twentieth century world index for equities and bonds 108 8.3 Ex post benefits from holding the world index 111 8.4 Correlations between countries 114 8.5 Prospective gains from international diversification 117 8.6 Home bias and constraints on international investment 120 8.7 Summary 123 Chapter 9 Size effects and seasonality in stock returns 124 9.1 The size effect in the United States 124 9.2 The size effect in the United Kingdom 126 9.3 The size effect around the world 129 9.4 The reversal of the size premium 131 9.5 Seasonality and size 135 9.6 Summary 138 Chapter 10 Value and growth in stock returns 139 10.1 Value versus growth in the United States 139 10.2 Value and growth investing in the United Kingdom 142 10.3 The international evidence 145 10.4 Summary 148 Chapter 11 Equity dividends 149 11.1 The impact of income 149 11.2 US and UK dividend growth 152 11.3 Dividend growth around the world 154 11.4 Dividend growth, GDP growth, and real equity returns 155 11.5 Dividend yields around the world and over time 157 11.6 Disappearing dividends 158 11.7 Summary 161 Chapter 12 The equity risk premium 163 12.1 US risk premia relative to bills 163 12.2 Worldwide risk premia relative to bills 166 12.3 US risk premia relative to bonds 169 12.4 Worldwide risk premia relative to bonds 171 12.5 Summary 173 Chapter 13 The prospective risk premium 176 13.1 Why the risk premium matters 177 13.2 How big should the risk premium be? 179 13.3 Measuring the premium 181 13.4 Arithmetic and geometric premia 183 13.5 The changing consensus 185 13.6 History as a guide to the future 188 13.7 Expectations of the risk premium 190 13.8 Summary 193 Chapter 14 Implications for investors 195 14.1 Market risk in the twenty-first century 195 14.2 Inferences from other markets 199 14.3 What does the future hold? 202 14.4 Implications for individual investors 204 14.5 Implications for investment institutions 207 14.6 Summary 209 Chapter 15 Implications for companies 211 15.1 The cost of capital 211 15.2 Corporate investment decisions 215 15.3 Corporate financing decisions 217 15.4 Summary 219 Chapter 16 Conclusion 220 16.1 Long-term returns 220 16.2 Key messages 222 16.3 Conclusion 224 Part Two: Sixteen countries, one world 225 Chapter 17 Our global database 227 Chapter 18 Australia 229 Chapter 19 Belgium 234 Chapter 20 Canada 239 Chapter 21 Denmark 244 Chapter 22 France 249 Chapter 23 Germany 254 Chapter 24 Ireland 259 Chapter 25 Italy 264 Chapter 26 Japan 269 Chapter 27 The Netherlands 274 Chapter 28 South Africa 279 Chapter 29 Spain 284 Chapter 30 Sweden 289 Chapter 31 Switzerland 294 Chapter 32 United Kingdom 299 Chapter 33 United States 306 Chapter 34 World 311 References 316 About the authors 331 Index 333

"This will become the definitive empirical basis for analysis of the world's capital markets over the twentieth century. It is an important work of scholarship; no one else has calculated the equity premium of a large number of countries over the long term. In doing so, the book contributes to the very lively debate on the magnitude of the equity premium and will make a splash."—William Goetzmann, Yale University

"Recent years have seen unprecedented public interest in the stock market, but there is a tendency for investors to concentrate on recent U.S. stock market performance. Progress in understanding financial markets requires a much longer timeframe and a global perspective. This book presents and analyzes data from many countries in a simple, standardized way that makes comparisons easy. It makes a number of extremely important points and goes well beyond simple summaries of average returns and historical volatilities to look at such issues as seasonality and industrial structure."—John Campbell, Harvard University

"No investor can afford to risk a penny in the markets without studying this book and absorbing its fascinating lessons. That advice applies whether you are professional or amateur, a youngster or hardened from experience, bold or conservative. This book is history at its most challenging and illuminating. The facts are astonishing, the presentation dazzling, the analysis brilliant, and the lessons profound."—Peter L. Bernstein, author of Capital Ideas and Against the Gods

"This is an important addition to the investment literature and will be widely used by both the academic and business community. To have the scope of data and analysis contained in this book available in one place represents a major contribution and improvement over what is now available."—Martin J. Gruber, New York University

This will become the definitive empirical basis for analysis of the world's capital markets over the twentieth century. It is an important work of scholarship; no one else has calculated the equity premium of a large number of countries over the long term. In doing so, the book contributes to the very lively debate on the magnitude of the equity premium and will make a splash. -- William Goetzmann, Yale University Recent years have seen unprecedented public interest in the stock market, but there is a tendency for investors to concentrate on recent U.S. stock market performance. Progress in understanding financial markets requires a much longer timeframe and a global perspective. This book presents and analyzes data from many countries in a simple, standardized way that makes comparisons easy. It makes a number of extremely important points and goes well beyond simple summaries of average returns and historical volatilities to look at such issues as seasonality and industrial structure. -- John Campbell, Harvard University No investor can afford to risk a penny in the markets without studying this book and absorbing its fascinating lessons. That advice applies whether you are professional or amateur, a youngster or hardened from experience, bold or conservative. This book is history at its most challenging and illuminating. The facts are astonishing, the presentation dazzling, the analysis brilliant, and the lessons profound. -- Peter L. Bernstein, author of "Capital Ideas" and "Against the Gods" This is an important addition to the investment literature and will be widely used by both the academic and business community. To have the scope of data and analysis contained in this book available in one place represents a major contribution and improvement over what is now available. -- Martin J. Gruber, New York University