Friday, August 21, 2009

Equity Risk Premium chart of STI

Latest update (20 Aug 09)
ERP of STI = 4.64%

Equity Risk Premium chart - STI
Calculation: Equity Risk Premium (ERP) is the difference between earnings yield (inverse PE ratio) of STI and one-year interbank rate (12-month SIBOR)

Thanks to Nigel CK Tan for introducing me the ERP concept


Anonymous said...

Hi MD,

Should you not use the risk-free rate as the yield of the longest dated SGS bond ?

Just a thought.



Mike Dirnt said...


your definition may be valid. actually it depends on your holding period.

for the definition in this case, the author of "Show Me The Money" Teh Hooi Ling uses a 1 year SIBOR

Sgbluechip said...
This comment has been removed by the author.
Anonymous said...

Hi MD,

I see, okay, thanks, so that implies a one year holding period.

The reason is that i use the longest dated SGS bond (the closest approximation to a risk free investment in Singapore), in which case the ERP is 2.42


Julian said...

Hi Mike,

Am new to this concept.
Why is it in percentage?
Teh HL uses it to multiply by 10000.

Appreciate your input.

Julian Goh

Mike Dirnt said...

Hi Julian,

i think she used basis points? 100 basis points equal to 1%. basis points or %, whatever representation, they mean the same thing

Anonymous said...

you so-called risk free rate is wrong. It should be matched to the "duration" of the STI.Stocks have long duration.
If it is 20Y, then use the SGS 20Y rate.
Otherwise, it's just rubbish analysis.

Investor Ho said...

Three questions -
Would the earning yield be same as dividend yield for the purpose of calculating ERP ?
If the earning yield can only be used, what is the earnings yield that was used in the STI chart showing ERP as 4.6 ?
I would think SGS bond rate shd be used instead of SIBOR as SIBOR has no direct link to an investment yield as compared to SGS Bond. Do anyone agree ?

S. Ho said...

I wonder who create that STI chart on ERP. Is this from SGX itself ? Is it updated every day ? Anyway, great stuff !
May I suggest that the chart also shows the earnings yield or the SIBOR rate. In this way, we can see the variation in the gap between the 2 lines. Would the creator pls add this additional line to make it more dynamic and meaningful ?.

S. Ho said...

From the STI chart, ERP shows at 14% in Jan 2009. Is this possible ? What are the companies included in developing these data ? Those from Main board ? Is this a daily computation ? It is great if the chart can show an average line from Jan up to the periods it covers as well. Would the creator or the chartist include this line as well as the earning yield line. Good job !

choubix said...

I find it quite "funny" that a singaporean brought the concept of ERP to the world of investments ;)