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.
|
Text
ERP.pdf - Author's Accepted Manuscript Download (295kB) | Preview |
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 Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | David Schroeder |
| Date Deposited: | 28 May 2013 09:22 |
| Last Modified: | 02 Aug 2023 17:04 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/6878 |
Statistics
Additional statistics are available via IRStats2.
Archive Staff Only (login required)
 |
Edit/View Item |