Aggregate implied cost of capital, option-implied information and equity premium predictability

Patrick Launhardt and Felix Miebs

Finance Research Letters, 2020, vol. 35, issue C

Abstract: The aggregate implied cost of capital (ICC) from analyst estimates finds a variety of applications in finance and is documented to predict the equity premium. Yet, the construction of the analyst-based ICC is data intensive and imposes restrictions on the employed analyst estimates. We suggest a new way to obtain a market-wide ICC using implied information from index options. We show that the resulting ICC predicts the equity premium in- and out-of-sample. At the same time, we find that the predictive power of the aggregate ICC from analyst estimates is not prevalent in our sample once we control for the persistence of the variable.

Keywords: Implied cost of capital; Equity risk premium; Option-implied information; Predictive regression (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:35:y:2020:i:c:s1544612319305343

DOI: 10.1016/j.frl.2019.101305

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