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Merton Model For Assessing The Cost Of Capital, Mathematical Amount But Not Also Economic Amount Of Capm And Apt Models

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  • Maria PASCU-NEDELCU

    () (Bucharest Academy of Economic Studies, Romania)

Abstract

Models for assessing the cost of capital play a central role in substantiating investments decision. These models are often used to evaluate investments in trading securities on the stock market. This paper aims to highlight how a classic model of evaluation, inter-temporal CAPM model, in other words Merton model, can be written mathematically as the sum of two other classic models, CAPM and APT, but the results provided by it does not account for the positive results of the two components models. It is shown in this research that econometric tests of the model, on empirical data, it does not return more accurate results and more rigorous than either of the models used as components. The result of this research is to reveal the error in which the researchers fall when starting to build new econometric models for evaluation combining equations of existing models.

Suggested Citation

  • Maria PASCU-NEDELCU, 2011. "Merton Model For Assessing The Cost Of Capital, Mathematical Amount But Not Also Economic Amount Of Capm And Apt Models," Journal of Doctoral Research in Economics, The Bucharest University of Economic Studies, vol. 3(1), pages 47-61, March.
  • Handle: RePEc:aes:jdreco:v:3:y:2011:i:1:p:47-61
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    File URL: http://www.jdre.ase.ro/RePEc/aes/jdreco/20111005.pdf
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    References listed on IDEAS

    as
    1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    3. Fama, Eugene F., 1998. "Determining the Number of Priced State Variables in the ICAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 217-231, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    regression equations; exogenous variables; endogenous variables; heteroskedasticity; probability of occurrence for the null value; error probability;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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