Costs of Equity Capital and Model Mispricing

Lubos Pastor and Robert Stambaugh

No 6490, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Costs of equity for individual firms are estimated in a Bayesian framework using several factor-based pricing models. Substantial prior uncertainty about mispricing often produces an estimated cost of equity close to that obtained with mispricing precluded, even for a stock whose average return departs significantly from the pricing model's prediction. Uncertainty about which pricing model to use is less important, on average, than within-model parameter uncertainty. In the absence of mispricing uncertainty, uncertainty about factor premiums is generally the largest source of overall uncertainty about a firm's cost of equity, although uncertainty about betas is nearly as important.

JEL-codes: G12 G31 (search for similar items in EconPapers)
Date: 1998-04
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Journal of Finance, Vol. 54 (1999): 67-121.

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Related works:
Journal Article: Costs of Equity Capital and Model Mispricing (1999)
Working Paper: Costs of Equity Capital and Model Mispricing
Working Paper: Costs of Equity Capital and Model Mispricing
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