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http://ssrn.com/abstract=877446
 
 

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


Lubos Pastor


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Meenakshi Sinha


Cornerstone Research

Bhaskaran Swaminathan


LSV Asset Management

January 2006

NBER Working Paper No. w11941

Abstract:     
We reexamine 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.

Number of Pages in PDF File: 56

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Date posted: April 13, 2006  

Suggested Citation

Pastor, Lubos and Sinha, Meenakshi and Swaminathan, Bhaskaran, Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital (January 2006). NBER Working Paper No. w11941. Available at SSRN: http://ssrn.com/abstract=877446

Contact Information

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/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Meenakshi Sinha
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
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Citations:  68

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