BIS central bankers’ speeches  The core inputs to the analysis are firm-level measures of dividends and equity prices. The average dividend-price ratio in each industry segment is shown in Table 3. The mean dividend-price ratio across the panel is 2.6%. But there is a fairly significant degree of crosssectoral and time-series dispersion. For example, dividend-price ratios are almost twice as high in the energy and utilities sector as the health and pharmaceuticals sector. And mean dividend-price ratios were two thirds third higher in the 1990s compared to the 1980s. Table 3 Mean dividend-price ratio for firms in each industry segment Consumer  Energy & Utilities  Financials  Health  IT  Industrials  Materials  S&P  1.94  2.82  3.19  1.87  1.69  2.55  2.22  FTSE  4.12  3.96  2.63  1.38  2.92  3.81  3.16  To estimate (9), we require a selection of quantitative inputs. Taking these in turn: (a)  Company-specific risk premium  Following Miles (1993), the company risk premium is modelled based on firm-specific characteristics, in particular the company beta and the level of gearing: (10)  where .21 Betas are estimated using daily return data for firms listed on the S&P 500 and FTSE, together with daily data for the indices themselves.22 Mean estimated betas are shown in Table 4. These average below one for both UK and US firms.
More formally, the expected return can be written as the sum of the risk free rate and a companyspecific risk premium for company j:18 (3)  The actual return on an investment is the sum of the capital gain and the dividend yield: (4)  Assuming an efficient market, actual returns differ only from expected returns due to a forecast error which is uncorrelated with expected returns.19 Using this assumption, we can substitute (4) into (3) to give an equation for the equity price. 17  The return is $ – $ = $ divided by the cost of investment. 18  This is the case with the capital asset pricing model (CAPM) (Lintner (1965), Sharpe (1964)) and arbitrage pricing theory (Ross (1976)). Under the CAPM, for example, the company specific risk premium is equal to the company specific beta multiplied by the market risk premium  . This means  . 19  That is, we assume that  BIS central bankers’ speeches  . 5  (5)  So the price of the security is simply the expected price and dividend in the next period, discounted by the sum of the risk-free rate and the company-specific risk premium.