Market Inefficiency and Implied Cost of Capital Models

  title={Market Inefficiency and Implied Cost of Capital Models},
  author={T. Rusticus},
  • T. Rusticus
  • Published 2014
  • Business
  • In this paper, I examine the impact of market inefficiency on the properties of implied cost of capital (ICC) estimates. I show that market inefficiency will bias the relation between the ICC estimate and future returns upwards. Utilizing recently developed ICC estimates formed using regression based earnings forecasts, I show that a substantial portion of the returns to an ICC trading strategy stem from mispricing rather than expected returns. The biases induced by mispricing are most severe… CONTINUE READING
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