Costs of Equity Capital and Model Mispricing

63 Pages Posted: 4 Aug 2000 Last revised: 9 Oct 2010

See all articles by Lubos Pastor

Lubos Pastor

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

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: April 1998

Abstract

Costs of equity for individual firms are estimated in a Bayesian framework using several factor-based pricing models. Substantial prior uncertainty about mispricing often produces an estimated cost of equity close to that obtained with mispricing precluded, even for a stock whose average return departs significantly from the pricing model's prediction. Uncertainty about which pricing model to use is less important, on average, than within-model parameter uncertainty. In the absence of mispricing uncertainty, uncertainty about factor premiums is generally the largest source of overall uncertainty about a firm's cost of equity, although uncertainty about betas is nearly as important.

Suggested Citation

Pastor, Lubos and Stambaugh, Robert F., Costs of Equity Capital and Model Mispricing (April 1998). NBER Working Paper No. w6490. Available at SSRN: https://ssrn.com/abstract=226235

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Robert F. Stambaugh

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
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United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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