Analyst versus model-based earnings forecasts: implied cost of capital applications

摘要

We find that a composite implied cost of capital (ICC) estimate - based on the earnings forecasts generated by cross-sectional models - is highly correlated with future realised returns in both portfolio- and regression-based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time-varying nature of expected returns and risk premia, and provide up-to-date estimates of an implied Australian market risk premium.