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Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium

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Stotz, O. Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium. Credit and Capital Markets – Kredit und Kapital, 40(2), 317-341. https://doi.org/10.3790/ccm.40.2.317
Stotz, Olaf "Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium" Credit and Capital Markets – Kredit und Kapital 40.2, 2007, 317-341. https://doi.org/10.3790/ccm.40.2.317
Stotz, Olaf (2007): Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium, in: Credit and Capital Markets – Kredit und Kapital, vol. 40, iss. 2, 317-341, [online] https://doi.org/10.3790/ccm.40.2.317

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Regression Betas and Implied Betas: Their Respective Implications for the Equity Risk Premium

Stotz, Olaf

Credit and Capital Markets – Kredit und Kapital, Vol. 40 (2007), Iss. 2 : pp. 317–341

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Olaf Stotz, Aachen

References

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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)