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    The implied equity risk premium - an evaluation of empirical methods

    Schröder, David (2007) The implied equity risk premium - an evaluation of empirical methods. Kredit und Kapital 40 (4), pp. 583-613. ISSN 0023-4591.

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    Abstract

    A new approach of estimating a forward-looking equity risk premium (ERP) is to calculate an implied risk premium using present value (PV) formulas. This paper compares implied risk premia obtained from different PV models and evaluates them by analyzing their underlying firm-specific cost-of-capital estimates. It is shown that specific versions of dividend discount models (DDM) and residual income models (RIM) lead to similar ERP estimates. However, cross-sectional regression tests of individual firm risk suggest that there are qualitative differences between both approaches. Expected firm risk obtained from the DDM is more in line with standard asset pricing models and performs better in predicting future stock returns than estimates from the RIM.

    Metadata

    Item Type: Article
    Keyword(s) / Subject(s): equity risk premium, cost of capital, expected stock returns
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: David Schroeder
    Date Deposited: 28 May 2013 09:22
    Last Modified: 11 Oct 2016 11:59
    URI: http://eprints.bbk.ac.uk/id/eprint/6878

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