Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium
JOURNAL ARTICLE
Cite JOURNAL ARTICLE
Style
Format
Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium
Credit and Capital Markets – Kredit und Kapital, Vol. 40 (2007), Iss. 2 : pp. 317–341
Additional Information
Article Details
Author Details
Olaf Stotz, Aachen
References
-
Alexander, G. J./Chervany, N. L. (1980): On the estimation and stability of beta, Journal of Financial and Quantitative Analysis, 15, 123-137.
Google Scholar -
Ballwieser, W. (2005): Die Ermittlung impliziter Eigenkapitalkosten aus Gewinnschätzungen und Aktienkursen: Ansatz und Probleme. Schneider, D./Rückle, D./Küpper, H.-U./Wagner, F. W. (Eds.): Kritisches zur Rechnungslegung und Unternehmensbesteuerung, Festschrift für Theodor Siegel, 321-337, Duncker & Humblot, Berlin.
Google Scholar -
Banz, R. (1981): The relation between return and market value of common stocks, Journal of Financial Economics, 9, 3-18.
Google Scholar -
Beaver, W./Kettler, P./Scholes, M. (1970): The association between market determined and accounting determined risk measures. The Accounting Review, 45, 654-682.
Google Scholar -
Bos, T./Newbold, P. (1984): An empirical investigation of the possibility of stochastic systematic risk in the market model, Journal of Business, 57, 35-41.
Google Scholar
Abstract
This study proposes an alternative method for estimating a company's CAPM beta. A discounted residual income model is used to deduce market implied betas. Compared to the commonly used ordinary least squares (OLS) regression beta, the market implied beta is much better suited to explaining the cross section of realized returns. The implied beta yields a positive market risk premium of about 4 percent, while the regression beta yields a flat or negative market risk premium. Thus, when the implied beta is used, the CAPM seems to be a valid model for describing the cross section of stock returns. (JEL C21, G12)