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Empirical analysis of the generalized consumption asset pricing model: Estimating the cost of capital

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  • Michelfelder, Richard A.

Abstract

Other than the problematic discounted cash flow and capital asset pricing models that have been used for decades, no other asset pricing models have generally been adopted for estimating the cost of common equity capital. A recently developed and promising general consumption asset pricing model for estimating costs of common equity is successful in empirical tests and applied for estimating the cost of common equity. This research presents an empirical investigation of the model for application to the regulation of public utilities and stock market and compares the cost of capital results with the CAPM. The model is applicable for estimating the cost of common equity capital for any stock. The paper recommends that the GCAPM be considered as an additional asset model with the others that are typically used as additional information in estimating the cost of common equity capital.

Suggested Citation

  • Michelfelder, Richard A., 2015. "Empirical analysis of the generalized consumption asset pricing model: Estimating the cost of capital," Journal of Economics and Business, Elsevier, vol. 80(C), pages 37-50.
    • Handle: RePEc:eee:jebusi:v:80:y:2015:i:c:p:37-50
    DOI: 10.1016/j.jeconbus.2015.04.001
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    References listed on IDEAS

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    1. Ľuboš Pástor & Meenakshi Sinha & Bhaskaran Swaminathan, 2008. "Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital," Journal of Finance, American Finance Association, vol. 63(6), pages 2859-2897, December.
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    4. Pauline Ahern & Frank Hanley & Richard Michelfelder, 2011. "New approach to estimating the cost of common equity capital for public utilities," Journal of Regulatory Economics, Springer, vol. 40(3), pages 261-278, December.
    5. Michelfelder, Richard A. & Pilotte, Eugene A., 2011. "Treasury Bond risk and return, the implications for the hedging of consumption and lessons for asset pricing," Journal of Economics and Business, Elsevier, vol. 63(6), pages 582-604.
    6. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
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    Cited by:

    1. Michelfelder, Richard A. & Ahern, Pauline & D'Ascendis, Dylan, 2019. "Decoupling impact and public utility conservation investment," Energy Policy, Elsevier, vol. 130(C), pages 311-319.

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    More about this item

    Keywords

    Utility cost of capital; Consumption asset pricing model; GARCH; Utility regulation; DCF; CAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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