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

Pástor, Luboš, Meenakshi Sinha and Bhaskaran Swaminathan
Authors registered in the RePEc Author Service: Lubos Pastor

No 5462, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-fin and nep-rmg
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital (2008)
Working Paper: Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital (2006)
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