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Empirical Estimation of the Cost of Equity: An Application to Selected Brazilian Utilities Companies

Author

Listed:
  • Marcelo Bianconi

    (Department of Economics, Tufts University 111 Braker Hall, Medford, MA 02155 U.S.A.)

  • Joe Akira Yoshino

    (Department of Economics, FEA, University of S?o Paulo S?o Paulo, Brazil 05508-900 BRAZIL)

Abstract

We provide an extensive set of alternative models for the estimation of the real cost of equity in a sample of utilities firms in Brazil with monthly data from March 2006 to June 2011. The traditional CAPM is rejected, together with the Fama-French factors, due to a poor fit. Additional factors improve the fit of the models and the estimated betas and real cost of equity increase relative to the traditional CAPM and Fama-French models. Accounting for conditional heteroskedasticity shows that autocorrelation of variances is more important than news effects. The inclusion of higher order terms shows that the third order term is mostly significant and positive indicating preference for skewness in this sample period. Our estimates of betas and the implied predicted real cost of equity show that, across the best models, betas are significantly below unity in the range 0.26-0.73. The predicted real cost of equity, across the best models, for Brazil in this sector and sample period is in the range of 8.7% to 13.2% per year.

Suggested Citation

  • Marcelo Bianconi & Joe Akira Yoshino, 2015. "Empirical Estimation of the Cost of Equity: An Application to Selected Brazilian Utilities Companies," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 1-21, February.
    • Handle: RePEc:bap:journl:150101
    Note: The authors thank the Department of Economics at FEA-USP, FIPE, Fapesp and the Department of Economics at Tufts University for financial support.
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    More about this item

    Keywords

    Asset pricing; Multifactor model; CAPM; Emerging markets;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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