Estimating the Equity Risk Premium Using Implied Cost of Capital
Title | Estimating the Equity Risk Premium Using Implied Cost of Capital PDF eBook |
Author | Ruihao Ke |
Publisher | |
Pages | 42 |
Release | 2014 |
Genre | |
ISBN |
Research on the implied cost of capital (ICC) has found that the equity risk premium is approximately 3%, on average, much lower than estimates based on the mean of historical stock market returns. The validity of such ICC estimates, however, faces both theoretical and empirical challenges. The theoretical equivalence between ICC and expected return requires the stringent condition that the latter is a constant, which is inconsistent with theory and empirical evidence. The empirical estimation of ICC depends on short-run and long-run earnings forecasts, whose biases can severely limit the validity of the estimates. By employing a forecasting procedure that induces little bias in both short-run and long-run forecasts and taking into account the stochastic nature of expected returns, we show that the average market risk premium ranges between 3% and 6%. We also demonstrate that the results of prior research are affected by input errors that are partially self-canceling.
Estimating the Cost of Capital Implied by Market Prices and Accounting Data
Title | Estimating the Cost of Capital Implied by Market Prices and Accounting Data PDF eBook |
Author | Peter Easton |
Publisher | Now Publishers Inc |
Pages | 148 |
Release | 2009 |
Genre | Business & Economics |
ISBN | 1601981945 |
Estimating the Cost of Capital Implied by Market Prices and Accounting Data focuses on estimating the expected rate of return implied by market prices, summary accounting numbers, and forecasts of earnings and dividends. Estimates of the expected rate of return, often used as proxies for the cost of capital, are obtained by inverting accounting-based valuation models. The author describes accounting-based valuation models and discusses how these models have been used, and how they may be used, to obtain estimates of the cost of capital. The practical appeal of accounting-based valuation models is that they focus on the two variables that are commonly at the heart of valuations carried out by equity analysts -- forecasts of earnings and forecasts of earnings growth. The question at the core of this monograph is -- How can these forecasts be used to obtain an estimate of the cost of capital? The author examines the empirical validity of the estimates based on these forecasts and explores ways to improve these estimates. In addition, this monograph details a method for isolating the effect of any factor of interest (such as cross-listing, fraud, disclosure quality, taxes, analyst following, accounting standards, etc.) on the cost of capital. If you are interested in understanding the academic literature on accounting-based estimates of expected rate of return this monograph is for you. Estimating the Cost of Capital Implied by Market Prices and Accounting Data provides a foundation for a deeper comprehension of this literature and will give a jump start to those who have an interest in these topics. The key ideas are introduced via examples based on actual forecasts, accounting information, and market prices for listed firms, and the numerical examples are based on sound algebraic relations.
Cost of Capital
Title | Cost of Capital PDF eBook |
Author | Shannon P. Pratt |
Publisher | John Wiley & Sons |
Pages | 1344 |
Release | 2014-03-12 |
Genre | Business & Economics |
ISBN | 1118852826 |
A one-stop shop for background and current thinking on the development and uses of rates of return on capital Completely revised for this highly anticipated fifth edition, Cost of Capital contains expanded materials on estimating the basic building blocks of the cost of equity capital, the risk-free rate, and equity risk premium. There is also discussion of the volatility created by the financial crisis in 2008, the subsequent recession and uncertain recovery, and how those events have fundamentally changed how we need to interpret the inputs to the models we use to develop these estimates. The book includes new case studies providing comprehensive discussion of cost of capital estimates for valuing a business and damages calculations for small and medium-sized businesses, cross-referenced to the chapters covering the theory and data. Addresses equity risk premium and the risk-free rate, including the impact of Federal Reserve actions Explores how to use Morningstar's Ibbotson and Duff Phelps Risk Premium Report data Discusses the global cost of capital estimation, including a new size study of European countries Cost of Capital, Fifth Edition puts an emphasis on practical application. To that end, this updated edition provides readers with exclusive access to a companion website filled with supplementary materials, allowing you to continue to learn in a hands-on fashion long after closing the book.
The Equity Risk Premium
Title | The Equity Risk Premium PDF eBook |
Author | William N. Goetzmann |
Publisher | Oxford University Press |
Pages | 568 |
Release | 2006-11-16 |
Genre | Business & Economics |
ISBN | 0199881979 |
What is the return to investing in the stock market? Can we predict future stock market returns? How have equities performed over the last two centuries? The authors in this volume are among the leading researchers in the study of these questions. This book draws upon their research on the stock market over the past two dozen years. It contains their major research articles on the equity risk premium and new contributions on measuring, forecasting, and timing stock market returns, together with new interpretive essays that explore critical issues and new research on the topic of stock market investing. This book is aimed at all readers interested in understanding the empirical basis for the equity risk premium. Through the analysis and interpretation of two scholars whose research contributions have been key factors in the modern debate over stock market perfomance, this volume engages the reader in many of the key issues of importance to investors. How large is the premium? Is history a reliable guide to predict future equity returns? Does the equity and cash flows of the market? Are global equity markets different from those in the United States? Do emerging markets offer higher or lower equity risk premia? The authors use the historical performance of the world's stock markets to address these issues.
The Equity Risk Premium
Title | The Equity Risk Premium PDF eBook |
Author | Bradford Cornell |
Publisher | John Wiley & Sons |
Pages | 248 |
Release | 1999-05-26 |
Genre | Business & Economics |
ISBN | 9780471327356 |
Das Thema Risikoprämie für Aktien (Equity Risk Premium) wird hier zum ersten Mal verständlich erklärt. Die Risikoprämie für Aktien stellt einen Renditeausgleich dar für das erhöhte Risiko, das ein Anleger bei der Investition in Aktien eingeht, im Vergleich zu einer Investition in risikofreie Staatsanleihen. Die Risikoprämie ist zwar von der Theorie her einfach, jedoch in der Praxis ein sehr komplexes Phänomen. Für Finanzentscheidungen ist es von größter Bedeutung, daß man das Prinzip der Risikoprämie versteht und es anwenden kann. Cornell erläutert das Thema Schritt für Schritt sehr anschaulich und ohne terminologischen Ballast. Zunächst wird die Risikoprämie im Zusammenhang mit der Geschichte des Aktienmarktes betrachtet. Der Haussemarkt der 90er dient dabei als Fallstudie. Cornell zeigt, welche Rückschlüsse man durch die Analyse der Risikoprämie im historischen Verlauf für den Aktienmarkt ziehen kann, z.B. ob Aktienkurse steigen oder fallen oder ob sich der Aktienmarkt verändert. Vorausschauende Schätzungen der Risikoprämie werden anhand verschiedener konkurrierender Modelle analysiert, wobei die Vorzüge der jeweiligen Methode mitbewertet werden. 'Equity Risk Premium' ist das erste Buch, das dieses wichtige Prinzip der Risiko-Nutzen-Analyse erschöpfend behandelt. Es vermittelt einen tiefen Einblick und deckt alle Grundlagen ab, damit Investoren fundierte Finanzentscheidungen treffen können. Ein absolutes Muß für institutionelle Anleger, Geldmanager und Finanzvorstände, die auf eine fundierte Marktanalyse zurückgreifen müssen. (06/99)
The Implied Equity Risk Premium - An Evaluation of Empirical Methods
Title | The Implied Equity Risk Premium - An Evaluation of Empirical Methods PDF eBook |
Author | David Schröder |
Publisher | |
Pages | 32 |
Release | 2008 |
Genre | |
ISBN |
A new approach of estimating a forward-looking equity risk premium (ERP) is to calculate an implied risk premium using present value (PV) formulas. This paper compares implied risk premia obtained from different PV models and evaluates them by analyzing their underlying firm-specific cost-of-capital estimates. It is shown that specific versions of dividend discount models (DDM) and residual income models (RIM) lead to similar ERP estimates. However, cross-sectional regression tests of individual firm risk suggest that there are qualitative differences between both approaches. Expected firm risk obtained from the DDM is more in line with standard asset pricing models and performs better in predicting future stock returns than estimates from the RIM.
Estimating the Intertemporal Risk-return Tradeoff Using the Implied Cost of Capital
Title | Estimating the Intertemporal Risk-return Tradeoff Using the Implied Cost of Capital PDF eBook |
Author | Luboš Pástor |
Publisher | |
Pages | 72 |
Release | 2006 |
Genre | Capital investments |
ISBN |
We reexamine the time-series relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G-7 countries. We find strong support for a positive intertemporal mean-variance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G-7 financial markets.