I extract the implied factor premiums (IFP) from a Fama-French three-factor
model using a combination of historical returns and implied cost of capital
(ICC) estimates. The historical returns are used to estimate firm-level risk
coefficients of the three-factor model. Subsequently, the stocks are sorted into
portfolios according to their risk loadings. Afterwards, the risk coefficients are
aggregated along the portfolios and regressed against the value-weighted ICC
estimates of the respective portfolios to obtain the implied factor premiums.
Finally, I test the predictive power of this method as well as the time series
behavior of these implied factor premiums. Although I find that the IFP are
less noisy than the Fama-French risk premiums, the predictive power is poor
for two of three factors. Nevertheless, the strong performance of the implied
value premium is an economical meaningful result of my analysis. However,
I conclude that this new method is not an improvement for the modern asset
pricing theory.
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I extract the implied factor premiums (IFP) from a Fama-French three-factor
model using a combination of historical returns and implied cost of capital
(ICC) estimates. The historical returns are used to estimate firm-level risk
coefficients of the three-factor model. Subsequently, the stocks are sorted into
portfolios according to their risk loadings. Afterwards, the risk coefficients are
aggregated along the portfolios and regressed against the value-weighted ICC
estimates of the respect...
»