Which Measure of Aggregate Implied Cost of Capital Predicts Equity Market Returns?

34 Pages Posted: 24 May 2016

See all articles by Ian A. Cooper

Ian A. Cooper

London Business School

Arkodipta Sarkar

London Business School, Department of Finance, Students

Date Written: May 24, 2016

Abstract

We investigate the relative ability of two measures of the market implied cost of capital to predict aggregate equity market returns. One is Aggregate ICC, which is a weighted average of individual firms’ ICC’s. The other is ICC calculated using index information (Index ICC). Index ICC predicts market returns more robustly than Aggregate ICC. Using 11 countries we show that predictability occurs only at longer horizons. The characteristics of Index ICC are consistent with it capturing the time-series variation of the long-run expected return.

Keywords: Implied Cost of Capital, Return Predictability, Expected Returns, Dividend Discount Model

JEL Classification: G10, G11, G12, G17

Suggested Citation

Cooper, Ian Anthony and Sarkar, Arkodipta, Which Measure of Aggregate Implied Cost of Capital Predicts Equity Market Returns? (May 24, 2016). Available at SSRN: https://ssrn.com/abstract=2783709 or http://dx.doi.org/10.2139/ssrn.2783709

Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
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United Kingdom
+44 171 262 5050 (Phone)

Arkodipta Sarkar

London Business School, Department of Finance, Students ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

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