Predicting market returns using aggregate implied cost of capital

By Yan Li, David T. Ng, Bhaskaran Swaminathan. 2013

161 citations recorded by the source corpus.

Theoretically, the implied cost of capital (ICC) is a good proxy for time-varying expected returns. We find that aggregate ICC strongly predicts future excess market returns at horizons ranging from one month to four years. This predictive power persists even in the presence of popular valuation ratios and business cycle variables, both in-sample and out-of-sample, and is robust to alternative implementations. We also find that ICCs of size and book-to-market portfolios predict corresponding portfolio returns.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/b230be62aa250897f21b8775b1fbbfc44205bebf

Citations in the corpus

• Investment and the Weighted Average Cost of Capital (2016, unknown): “…drawing on work by Gebhardt, Lee, and Swaminathan (2001), Pastor, Sinha, and Swaminathan (2008), Chava and Purnanandam (2010), Hou, van Dijk, and Zhang (2012), Li, Ng, and Swaminathan (2013) and Tang, Wu, and Zhang (2014). information for investment that is distinct from that provided by the ICC.”