What question did this study set out to answer?

To evaluate whether the implied cost of capital, derived from corporate earnings forecasts, effectively captures time-varying expected stock returns and the intertemporal risk-return tradeoff.

November 11, 2008The Journal of FinanceOpen Access

Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital

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Authors

ĽPĽuboš PástorUniversity of Chicago MSMeenakshi SinhaIndian School of Business BSBhaskaran SwaminathanJohnson & Johnson (United States)

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Implication

Empirical analysis reveals a positive risk-return relation across G-7 markets using the implied cost of capital, indicating its utility in modeling conditional expected returns.

Key Points

To evaluate whether the implied cost of capital, derived from corporate earnings forecasts, effectively captures time-varying expected stock returns and the intertemporal risk-return tradeoff.
Derived analytical proofs and conducted simulation experiments assessing the correlation between implied cost of capital (ICC) and conditional expected stock returns under varying earnings forecast qualities.
Constructed country-level and global market ICC time-series datasets across G-7 countries to empirically test the relationship between conditional mean and variance of stock returns.
Theoretical and simulation analyses confirmed that ICC remains closely correlated with conditional expected returns and captures risk-return dynamics even when earnings forecasts contain measurement errors.
Empirical tests demonstrated a statistically positive relationship between the conditional mean and conditional variance of stock returns at both the individual G-7 country level and the aggregate world market level.

Cite This Study

Pástor et al. (2008) studied this question.

synapsesocial.com/papers/6a10392cd13714ec96ff67ae https://doi.org/10.1111/j.1540-6261.2008.01415.x

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Implication

Empirical analysis reveals a positive risk-return relation across G-7 markets using the implied cost of capital, indicating its utility in modeling conditional expected returns.

Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital

Discussion

Member takes

Implication

Key Points

Cite This Study

Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital

Discussion

Member takes

Implication

Key Points

Cite This Study

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