Aggregate Implied Cost of Capital, Option Implied Information and Equity Premium Predictability

Posted: 21 Jun 2019 Last revised: 7 Oct 2019

See all articles by Patrick Launhardt

Patrick Launhardt

University of Ulm

Felix Miebs

University of Applied Sciences Cologne

Date Written: May 30, 2019

Abstract

The aggregate implied cost of capital (ICC) from analyst estimates finds a variety of applications in finance and is documented to predict the equity premium. Yet, the construction of the analyst-based ICC is data intensive and imposes restrictions on the employed analyst estimates. We suggest a new way to obtain a market-wide ICC using implied information from index options. We show that the resulting ICC predicts the equity premium in- and out-of-sample. At the same time, we find that the predictive power of the aggregate ICC from analyst estimates is not prevalent in our sample once we control for the persistence of the variable.

Keywords: implied cost of capital; equity risk premium; option implied information; predictive regression

JEL Classification: G12

Suggested Citation

Launhardt, Patrick and Miebs, Felix, Aggregate Implied Cost of Capital, Option Implied Information and Equity Premium Predictability (May 30, 2019). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3405213 or http://dx.doi.org/10.2139/ssrn.3405213

Patrick Launhardt

University of Ulm ( email )

Albert-Einstein-Alee 11
Ulm, D-89081
Germany

Felix Miebs (Contact Author)

University of Applied Sciences Cologne ( email )

Claudiusstrasse 1
Cologne, 50678
United States

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