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Cost of Capital and Regulator’s Preferences: Investigation into a new method of estimating regulatory bias

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Author Info
Sancetta, A.
Satchell, S.E.

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Abstract

When computing regulated prices, the standard method is the capital asset pricing model (CAPM) which involves the estimation of a single parameter: the beta of the company. Yet, these computational methods fail to take into account any preference the regulator might have to increase or decrease the beta to favour or punish investors or customers. We propose such a methodology based on what we call a Linex linear optimal method.

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File URL: http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe0441.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0441.

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Length: 22
Date of creation: Jul 2004
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Handle: RePEc:cam:camdae:0441

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Related research
Keywords: cost of capital; CAPM; linear predictor; linex;

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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  1. Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-95, June. [Downloadable!] (restricted)
  2. Elliott, Graham & Timmermann, Allan, 2004. "Optimal forecast combinations under general loss functions and forecast error distributions," Journal of Econometrics, Elsevier, vol. 122(1), pages 47-79, September. [Downloadable!] (restricted)
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