The market risk premium in Australia: Forward‐looking evidence from the options market

Abstract

This paper analyses forward‐looking estimates of the expected market return in Australian. By utilising option prices, we compute a lower bound for the capital gain and dividend components of the expected return. Over a 17‐year period, the average 1‐month expected return lower bound is found to be 8.6% per annum, compared with an average realised return of 10.9% per annum. Our option‐based estimates demonstrate significant predictive power beyond historical averages and enable direct measurement of the expected return term structure. This approach complements traditional measures of expected returns and offers valuable insights for practitioners, academics, and policymakers in Australia.