Costs of Equity Capital and Model Mispricing

   (2912 K)

Costs of equity for individual firms are estimated in a Bayesian framework using several factor-based pricing models. Substantial prior uncertainty about mispricing often produces an estimated cost of equity close to that obtained with mispricing precluded, even for a stock whose average return departs significantly from the pricing model's prediction. Uncertainty about which pricing model to use is less important, on average, than within-model parameter uncertainty. In the absence of mispricing uncertainty, uncertainty about factor premiums is generally the largest source of overall uncertainty about a firm's cost of equity, although uncertainty about betas is nearly as important.

Published: Journal of Finance, Vol. 54 (1999): 67-121.

This paper is available as PDF (2912 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX