The equity risk premium (ERP) is the price of risk in equity markets and is a key input in estimating costs of equity and capital. The standard approach to estimating ERP uses historical returns, but this approach has limitations, especially in emerging markets with limited and volatile data. Two other approaches to estimating ERP are the survey approach, where investors and managers assess the premium, and the implied premium approach, which uses forward-looking estimates of the premium. The ERP is also related to risk premiums in the bond market (default spreads) and in real estate markets. Understanding the determinants and estimation of ERP is important for assessing the overall market and making informed investment decisions.
