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Estimating the cost of capital of the UK's newly privatized utilities

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  • Andrew Clare
  • Richard Priestley

Abstract

In this paper the cost of capital of the UK's newly privatized utilities is estimated using both the CAPM and the APT. It is found that the APT provides a better description of excess security returns than the CAPM. However, neither model can explain the crosssection of excess returns on the sample of UK utilities. The failure of the factor models is traced to the existence of considerable idiosyncratic risk inherent in the utility stocks.

Suggested Citation

  • Andrew Clare & Richard Priestley, 1996. "Estimating the cost of capital of the UK's newly privatized utilities," Applied Economics Letters, Taylor & Francis Journals, vol. 3(10), pages 653-657.
    • Handle: RePEc:taf:apeclt:v:3:y:1996:i:10:p:653-657
    DOI: 10.1080/135048596355871
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    References listed on IDEAS

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    1. Roll, Richard & Ross, Stephen A, 1980. "An Empirical Investigation of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 35(5), pages 1073-1103, December.
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    3. Clare, A D & Thomas, S H & Wickens, M R, 1994. "Is the Gilt-Equity Yield Ratio Useful for Predicting UK Stock Returns?," Economic Journal, Royal Economic Society, vol. 104(423), pages 303-315, March.
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    6. Burmeister, Edwin & McElroy, Marjorie B, 1988. " Joint Estimation of Factor Sensitivities and Risk Premia for the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 721-733, July.
    7. Bower, Dorothy H & Bower, Richard S & Logue, Dennis E, 1984. "Arbitrage Pricing Theory and Utility Stock Returns," Journal of Finance, American Finance Association, vol. 39(4), pages 1041-1054, September.
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