Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital

56 Pages Posted: 13 Apr 2006  

Lubos Pastor

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

Meenakshi Sinha

Cornerstone Research

Bhaskaran Swaminathan

LSV Asset Management

Multiple version iconThere are 3 versions of this paper

Date Written: January 2006

Abstract

We reexamine the time-series relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G-7 countries. We find strong support for a positive intertemporal mean-variance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G-7 financial markets.

Suggested Citation

Pastor, Lubos and Sinha, Meenakshi and Swaminathan, Bhaskaran, Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital (January 2006). NBER Working Paper No. w11941. Available at SSRN: https://ssrn.com/abstract=877446

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4080 (Phone)
773-702-0458 (Fax)

HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Meenakshi Sinha

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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