Testing International Asset Pricing Models Using Implied Costs of Capital

44 Pages Posted: 17 Mar 2004

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

David T. Ng

Johnson College of Business

Bhaskaran Swaminathan

LSV Asset Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 19, 2007

Abstract

This paper tests international asset pricing models using firm level expected returns estimated from the implied cost of capital approach and contrasts the results with those based on realized returns. Among G7 countries, we find that the implied cost of capital based expected returns are only one-tenth as volatile as those based on realized returns. As a result, while tests based on both implied cost of capital and realized returns produce economically similar findings, only tests based on implied cost of capital are statistically significant. Our results show that expected returns increase with world market beta, return volatility, financial leverage, and book-to-market ratios and decrease with currency beta and firm size. Overall, the evidence suggests that the implied cost of capital approach provides better insights into the cross-sectional determinants of firm-level expected returns in the international context.

Suggested Citation

Lee, Charles M.C. and Ng, David T. and Swaminathan, Bhaskaran, Testing International Asset Pricing Models Using Implied Costs of Capital (June 19, 2007). Available at SSRN: https://ssrn.com/abstract=481922 or http://dx.doi.org/10.2139/ssrn.481922

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

David T. Ng (Contact Author)

Johnson College of Business ( email )

301G Warren Hall, Cornell University
Ithaca, NY 14850-1967
United States
6072550145 (Phone)

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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