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Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital

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  • Pástor, Luboš
  • Sinha, Meenakshi
  • Swaminathan, Bhaskaran

Abstract

We re-examine the time-series relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G-7 countries. We find strong support for a positive intertemporal mean-variance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G-7 financial markets.

Suggested Citation

  • Pástor, Luboš & Sinha, Meenakshi & Swaminathan, Bhaskaran, 2006. "Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital," CEPR Discussion Papers 5462, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5462
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    More about this item

    Keywords

    implied cost of capital; international integration; risk-return tradeoff;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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