TY  - JOUR
AU  - Pastor,Lubos
AU  - Stambaugh,Robert F.
TI  - Costs of Equity Capital and Model Mispricing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6490
PY  - 1998
Y2  - April 1998
UR  - http://www.nber.org/papers/w6490
L1  - http://www.nber.org/papers/w6490.pdf
N1  - Author contact info:
Lubos Pastor
University of Chicago
Booth School of Business
5807 South Woodlawn Ave
Chicago, IL  60637
Tel: 773/834-4080
Fax: NA
E-Mail: lubos.pastor@chicagobooth.edu

Robert F. Stambaugh
Finance Department
The Wharton School
University of Pennsylvania
Philadelphia, PA   19104-6367
Tel: 215/898-5734
Fax: 215/898-6200
E-Mail: stambaugh@wharton.upenn.edu
AB  - 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.
ER  -