Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital
58 Pages Posted: 27 Apr 2006
There are 3 versions of this paper
Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital
Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital
Date Written: January 2006
Abstract
We re-examine 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.
Keywords: Implied cost of capital, risk-return tradeoff, international integration
JEL Classification: G1
Suggested Citation: Suggested Citation
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