MOST investors know that the stock market is expected to perform better - in the long run - than bonds or a risk-free bank account. In other words, shares tend to show much higher volatility in the short term than bonds, but compensate by providing higher returns in the long term.

One of the purest and most illuminating comparisons is between gilts - which avoid the complications caused by corporate credit issues - and UK shares.

In the fifty years prior to the 2001 crash, analysis of these asset classes indicated that the stock market outperformed gilts by 5 per cent per annum. Comparing seven year periods within this time frame, shares outperformed gilts on nine out of 10 occasions.

The expectations for future equity risk premiums are of universal concern as they are used as an indication of future returns on the stock market. One event to provoke fresh examination of the issue was the intervention of the US Federal Reserve Bank - which lowered interest rates and injected liquidity into the money markets in January - at a time of impending stock market crisis. These actions - mirrored by the Bank of England - had the effect of supporting the market.

If investors become confident that tactics such as these will routinely be employed, the risk premium will tend to decline and there is evidence that the one-sided action of central banks is already leading investors to believe they are insured against market falls.

The recurring phenomenon of share prices which are too high to reflect fundamentals may be partly due to a belief that monetary policy will be used to support the market whenever it looks vulnerable and that continued corrective actions will be used until the stock market begins to rise again.

In market terms, professional and amateur investors alike behave as if they have bought a put option - a financial instrument which works like an insurance policy, protecting the investor against falling prices.

Investors behave in this way because they are aware of the pressure on central banks to prevent market panic. While central bank actions can exert pressure effectively on most occasions, they do not offer a viable insurance policy in all situations - like times of stagnant economies, for example.

Misguided belief in the existence of put options has been held responsible for reducing the equity risk premium from 4.3 per cent to about 2.6 per cent per annum in recent years even though investors' attitudes to risk do not seem to have changed.

There may be other reasons for this diminishing risk like more sophisticated financial modeling which can head off a crisis, and more sophisticated financial instruments to offset and distribute risk.

Whatever the market conditions and investors' appetite for risk, one conundrum persists. The 'equity premium puzzle' refers to the inexplicably high premium demanded by stock market investors over other safer investments.

This premium is far higher than their risk appetite would indicate. Seen from a different perspective, the stock market is not risky enough over the long term to justify the hefty premium.

Lesley Campbell is an award winning personal finance writer.