Industry Costs of Equity: Incorporating Prior Information

31 Pages Posted: 12 Jan 2018

See all articles by Ping McLemore

Ping McLemore

Federal Reserve Bank of Richmond - Quantitative Supervision & Research

Multiple version iconThere are 2 versions of this paper

Date Written: February 2018

Abstract

I examine whether incorporating economically motivated prior information yields more accurate forecasts of industry costs of equity. I find that incorporating the long‐run mean of the Capital Asset Pricing Model (CAPM) parameters and the industry characteristics in the cross section produces more accurate parameter estimates, which subsequently translate into more accurate out‐of‐sample forecasts of industry costs of equity. The outperformance of this method over rolling‐window estimates becomes larger as the forecast horizon extends into the future. These findings provide evidence that the CAPM parameters have a long‐run mean‐reversion property and correlate with the industry characteristics in a systematic way.

Keywords: CAPM, industry costs of equity, prior information, forecast error

JEL Classification: C11, G10, G12

Suggested Citation

McLemore, Ping, Industry Costs of Equity: Incorporating Prior Information (February 2018). Financial Review, Vol. 53, Issue 1, pp. 153-183, 2018, Available at SSRN: https://ssrn.com/abstract=3100461 or http://dx.doi.org/10.1111/fire.12156

Ping McLemore (Contact Author)

Federal Reserve Bank of Richmond - Quantitative Supervision & Research ( email )

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
433
PlumX Metrics