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https://hdl.handle.net/10419/55241

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

[working paper]

Breuer, Wolfgang
Gürtler, Marc

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 ... view more

"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]... view less

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

Handle
https://hdl.handle.net/10419/55241

Status
reviewed

Licence
Deposit Licence - No Redistribution, No Modifications

Data providerThis metadata entry was indexed by the Special Subject Collection Social Sciences, USB Cologne


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© 2007 - 2025 Social Science Open Access Repository (SSOAR).
Based on DSpace, Copyright (c) 2002-2022, DuraSpace. All rights reserved.