CAPM and alternative return on equity models - Final working paper - 16 December 2020

On Wednesday 16 December 2020 the AER published our final working paper on CAPM and alternative return on equity models. Our preferred options in the final paper are:

• To maintain the use of the (standard Sharpe-Lintner) CAPM as the foundation model
• Not to adopt a multiple-model approach (that is, using another model alongside the CAPM)
• To maintain the use of historical excess returns data to inform our estimate of the market risk premium.

The final paper also identifies areas for future work, such as on other measures to estimate the market risk premium; the merits of a relationship between the risk free rate and market risk premium; and the comparator set used to estimate equity beta.

This final paper marks the end of the working paper process for this topic, and there will not be an immediate round of stakeholder submissions. However, there will be further consultation on these issues at later stages of the 2022 review.