Fama-French, CAPM, and Implied Cost of Equity
36 Pages Posted: 1 Dec 2012 Last revised: 22 Jan 2020
Date Written: January 20, 2019
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: Suggested Citation