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Implied rates of return, the discount rate effect, and market risk premia

[working paper]

Breuer, Wolfgang; Gürtler, Marc

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Corporate Editor Technische Universität Braunschweig, Department Wirtschaftswissenschaften, Institut für Finanzwirtschaft
Abstract "We show analytically under quite general conditions that implied rates of return based on analysts’ earnings forecasts are only a downward biased estimator for future expected one-period returns and therefore not suited for computing market risk premia. The extent of this bias is substantial as verified by a bootstrap approach. We present an alternative estimation equation for future expected one-period returns based on current and past implied rates of return that is superior to simple estimators based on historical returns. The reason for this superiority is a lower variance of estimation results and not the circumvention of the discount rate effect typically stated as a major problem of estimators based on historical return realizations. The superiority of this new approach for portfolio selection purposes is verified numerically for our bootstrap environment and empirically for real capital market data." [author's abstract]
Keywords equity; return; trend; prognosis; analysis of variance
Classification Financial Planning, Accountancy
Free Keywords analysts' earnings forecasts; discount rate effect; equity premium puzzle; implied rate of return
Document language English
Publication Year 2010
City Braunschweig
Page/Pages 42 p.
Series IF Working Paper Series, IF33V3/10
Licence Deposit Licence - No Redistribution, No Modifications
data provider This metadata entry was indexed by the Special Subject Collection Social Sciences, USB Cologne