Fama-French, CAPM, and Implied Cost of Equity

36 Pages Posted: 1 Dec 2012 Last revised: 22 Jan 2020

See all articles by Dev R. Mishra

Dev R. Mishra

University of Saskatchewan - Edwards School of Business

Thomas J. O'Brien

University of Connecticut - Department of Finance

Date Written: January 20, 2019

Abstract

This study uses U.S. implied cost of equity observations to compare the CAPM with both ex ante and ex post versions of the Fama-French three-factor model. The ex ante version is a simple theoretical model that requires mutual consistency among the factor risk premium estimates, given the market’s level of risk aversion. In contrast, an ex post version is “unrestricted”, because the factor risk premium estimates are based on historical returns. The ex ante version explains the implied cost of equity observations better than the CAPM and two popular ex post versions.

Keywords: CAPM, Fama-French three-factor model, implied cost of equity, size factor, value factor, ex ante, geometric mean

JEL Classification: F3, G1, G3

Suggested Citation

Mishra, Dev R. and O'Brien, Thomas J., Fama-French, CAPM, and Implied Cost of Equity (January 20, 2019). Journal of Economics and Business 101, January-February 2019, 73-85., Available at SSRN: https://ssrn.com/abstract=2183118 or http://dx.doi.org/10.2139/ssrn.2183118

Dev R. Mishra

University of Saskatchewan - Edwards School of Business ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada
306-966-8457 (Phone)
306-966-2515 (Fax)

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3041 (Phone)
860-486-0634 (Fax)

HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

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