Is the United States a Lucky Survivor? A Hierarchical Bayesian Approach

Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, finding that it explains about one-third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the United States by cross-learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in-sample and to shocks to valuations resulting from learning about the probability.