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On the Estimation of Cost of Capital and its Reliability

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  • Wing-Keung Wong

    (National University of Singapore)

  • Raymond H. Chan

    (Chinese University of Hong Kong)

Abstract

Gordon and Shapiro (1956) first equated the price of a share with the present value of future dividends and derived the well-known relationship. Since then, there have been many improvements on the theory. For example, Thompson (1985, 1987) combined the "dividend yield plus growth" method with Box-Jenkins time series analysis of past dividend experience to estimate the cost of capital and its "reliability" for individual firms. Thompson and Wong (1991, 1996) proved the existence and uniqueness of the cost of capital and provided formula to estimate both the cost of capital and its reliability. However, their approaches cannot be used if the "reliability" does not exist or if there are multiple solutions for the "reliability". In this paper, we extend their theory by proving the existence and uniqueness of this reliability. In addition, we propose the estimators for the reliability and prove that the estimators converge to a true parameter. The estimation approach is further simplified, hence rendering computation easier. In addition, the properties of the cost of capital and its reliability will be analyzed with illustrations of several commonly used Box-Jenkins models.

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Bibliographic Info

Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0401.

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Date of creation: Mar 2004
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Handle: RePEc:nus:nusewp:wp0401

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  1. Wing-Keung Wong & Meher Manzur & Boon-Kiat Chew, 2002. "How Rewarding Is Technical Analysis? Evidence From Singapore Stock Market," Departmental Working Papers wp0216, National University of Singapore, Department of Economics.
  2. Wong, Wing-Keung & Li, Chi-Kwong, 1999. "A note on convex stochastic dominance," Economics Letters, Elsevier, vol. 62(3), pages 293-300, March.
  3. Wing-Keung Wong & Robert B. Miller & Keshab Shrestha, 2002. "Maximum Likelihood Estimation of ARMA Model with Error Processes for Replicated Observations," Departmental Working Papers wp0217, National University of Singapore, Department of Economics.
  4. Meher Manzur & Wing-Keung Wong & Inn-Chau Chee, 1999. "Measuring international competitiveness: experience from East Asia," Applied Economics, Taylor & Francis Journals, vol. 31(11), pages 1383-1391.
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Cited by:
  1. Wong, Wing-Keung & Bian, Guorui, 2005. "Estimating parameters in autoregressive models with asymmetric innovations," Statistics & Probability Letters, Elsevier, vol. 71(1), pages 61-70, January.
  2. Wing-Keung Wong & Guorui Bian, 2005. "Robust Estimation of Multiple Regression Model with asymmetric innovations and Its Applicability on Asset Pricing Model," Departmental Working Papers wp0508, National University of Singapore, Department of Economics.
  3. Wing-Keung Wong & Aman Agarwal & Jun Du, 2005. "Financial Integration for India Stock Market, a Fractional Cointegration Approach," Departmental Working Papers wp0501, National University of Singapore, Department of Economics.
  4. Wing-Keung Wong & Jun Du & Terence Tai-Leung Chong, 2005. "Do the technical indicators reward chartists? A study on the stock markets of China, Hong Kong and Taiwan," Finance Working Papers 22587, East Asian Bureau of Economic Research.
  5. Guorui Bian & Michael McAleer & Wing-Keung Wong, 2010. "Robust Estimation and Forecasting of the Capital Asset Pricing Model," Working Papers in Economics 10/66, University of Canterbury, Department of Economics and Finance.
  6. Eric S. Fung & Kin Lam & Tak-Kuen Siu & Wing-Keung Wong, 2011. "A Pseudo-Bayesian Model for Stock Returns In Financial Crises," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 4(1), pages 43-73, December.
  7. Wong Keung-Wing & Habibullah Khan & Jun Du, 2006. "Money, Interest Rate and Stock Prices: New Evidence from Singapore and The United States," Departmental Working Papers wp0601, National University of Singapore, Department of Economics.
  8. Wing-Keung Wong & Guorui Bian, 2005. "Robust Estimation of Multiple Regression Model with Non-normal Error: Symmetric Distribution," Development Research Unit Working Paper Series 09/05, Monash University, Department of Economics.
  9. Shih-Cheng Lee & Chien-Ting Lin & Min-Teh Yu, 2013. "A fractional cointegration approach to testing the Ohlson accounting based valuation model," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 535-547, October.
  10. Guorui Bian & Michael McAleer & Wing-Keung Wong, 2013. "Robust Estimation and Forecasting of the Capital Asset Pricing Model," Tinbergen Institute Discussion Papers 13-036/III, Tinbergen Institute.
  11. Wong, Wing-Keung & McAleer, Michael, 2009. "Mapping the Presidential Election Cycle in US stock markets," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(11), pages 3267-3277.
  12. Guo, Xu & Lam, Kin & Wong, Wing-Keung & Zhu, Lixing, 2012. "A New Pseudo-Bayesian Model of Investors' Behavior in Financial Crises," MPRA Paper 42535, University Library of Munich, Germany.
  13. Jung Hur & Kang Changhui, 2007. "School Systems and Efficiency and Equity of Education," Departmental Working Papers wp0701, National University of Singapore, Department of Economics.
  14. Wing-Keung Wong & Aman Agarwal & Nee-Tat Wong, 2006. "The Disappearing Calendar Anomalies in the Singapore Stock Market," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 11(2), pages 123-139, Jul-Dec.

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