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

58 Pages Posted: 27 Apr 2006

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

Meenakshi Sinha

Cornell University - Samuel Curtis Johnson Graduate School of Management; Cornerstone Research

Bhaskaran Swaminathan

LSV Asset Management

Multiple version iconThere are 3 versions of this paper

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

Pastor, Lubos and Sinha, Meenakshi and Sinha, Meenakshi and Swaminathan, Bhaskaran, Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital (January 2006). CEPR Discussion Paper No. 5462, Available at SSRN: https://ssrn.com/abstract=899387

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Meenakshi Sinha

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

NY 14853
United States
650-470-7085 (Phone)

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
11
Abstract Views
1,345
PlumX Metrics