publication . Bachelor thesis . 2014

Can we replace CAPM and the Three-Factor model with Implied Cost of Capital?

Löthman, Robert; Pettersson, Eric;
Open Access English
  • Published: 01 Jan 2014
  • Publisher: Uppsala universitet, Företagsekonomiska institutionen
  • Country: Sweden
Abstract
Researchers criticize predominant expected return models for being imprecise and based on fundamentally flawed assumptions. This dissertation evaluates Implied Cost of Capital, CAPM and the Three-Factor model abilities to estimate returns. We study each models expected return association to realized return and test for abnormal returns. Our sample covers the period 2000 to 2012 and includes 2916 US firms. We find that Implied Cost of Capital has a stronger association with realized returns than CAPM and the Three-Factor model. Implied Cost of Capital also has lower abnormal returns not accounted for by expected returns. Our results suggest that we can replace CA...
Subjects
free text keywords: Implied Cost of Capital, CAPM, Three-Factor model, expected returns, abnormal returns
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