Investments, tenth edition

 Figure 13.8 

Real returns on global stock markets. The 

figure displays average real returns for 39 markets over 

the period 1921 to 1996. Markets are sorted by years of 

existence. The graph shows that markets with long histo-

ries typically have higher returns. An asterisk indicates that 

the market suffered a long-term break.  

Percent per Annum

0

20

40

Years of Existence since Inception

Uruguay

Hungary

Czechoslovakia

Israel

Brazil

Pakistan

Egypt

Poland

Greece

Argentina*

Philippines

South Africa

Venezuela

India

Colombia

Peru*

Spain*

Portugal* Japan*

New Zealand

Belgium

Italy

France

Netherlands

Austria*

Ireland

Finland

Mexico

Denmark

Germany*

U.K.

Canada

Switzerland

Sweden

Chile*

Norway

Australia

60

80

100

U.S.

−6

−5

−4

−3

−2

−1

6

5

4

3

2

1

0

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  Empirical Evidence on Security Returns 

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“representative consumer” who holds all stock and bond market wealth does not face 

borrowing constraints. Young consumers, however, do face meaningful borrowing con-

straints. Constantinides traces their impact on the equity premium, the demand for bonds, 

and on the limited participation of many consumers in the capital markets. Finally, he 

shows that adding habit formation to the conventional utility function helps explain higher 

risk premiums than those that would be justified by the covariance of stock returns with 

aggregate consumption growth. He argues that integrating the notions of habit formation, 

incomplete markets, the life cycle, borrowing constraints, and other sources of limited 

stock market participation is a promising vantage point from which to study the prices 

of assets and their returns, both theoretically and empirically within the class of rational 

asset-pricing models.