The information in the equity risk premium

Normally, the equity risk premium provides information about investors’ level of risk aversion and perception of risk (of earnings variability, share prices, bankruptcy). But since risk-free long-term interest rates have become significantly lower than the growth rate, the sole purpose of the equity risk premium has been to top up the risk-free interest rate to obtain a discount rate that can be used to calculate the discounted sum of future dividends. So t he risk is that, in the recent period, the only information contained in the equity risk premium relates to the level of long-term interest rates. A statistical analysis of the cases of the United States and the euro zone in the recent period of very low interest rates (2014-2021) shows that the long-term interest rate has a significant negative effect on the equity risk premium, which is very large in the case of the euro zone (coefficient of -0.75).