Predicting market returns using aggregate implied cost of capital

Yan Li, David T. Ng and Bhaskaran Swaminathan

Journal of Financial Economics, 2013, vol. 110, issue 2, 419-436

Abstract: Theoretically, the implied cost of capital (ICC) is a good proxy for time-varying expected returns. We find that aggregate ICC strongly predicts future excess market returns at horizons ranging from one month to four years. This predictive power persists even in the presence of popular valuation ratios and business cycle variables, both in-sample and out-of-sample, and is robust to alternative implementations. We also find that ICCs of size and book-to-market portfolios predict corresponding portfolio returns.

Keywords: Implied cost of capital; Market predictability; Valuation ratios (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (68)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:2:p:419-436

DOI: 10.1016/j.jfineco.2013.06.006

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