Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/22919 
Year of Publication: 
2005
Series/Report no.: 
Bonn Econ Discussion Papers No. 13/2005
Publisher: 
University of Bonn, Bonn Graduate School of Economics (BGSE), Bonn
Abstract: 
A new approach of estimating a forward-looking equity risk premium (ERP) is to calculate the implied risk premium using present value (PV) formulas. This paper compares implied risk premia obtained from dierent PV models and evaluates them by analyzing their underlying firmspecific cost-of-capital estimates. It is shown that specific versions of dividend discount models (DDM) and residual income models (RIM) lead to similar ERP estimates. However, the results of cross-sectional regression tests of individual firm risk suggest that there are qualitative dierences between both approaches. Expected firm risk obtained from the DDM is more in line with standard asset pricing models and performs better in predicting future stock returns than estimates from the RIM.
Subjects: 
equity risk premium
cost of capital
expected stock returns
JEL: 
G12
Document Type: 
Working Paper

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