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Cost of Capital and Regulator’s Preferences: Investigation into a new method of estimating regulatory bias


Type

Working Paper

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Authors

Sancetta, Alessio 
Satchell, Stephen E. 

Abstract

When computing regulated prices, the standard method is the capital asset pricing model (CAPM) which involves the estimation of a single parameter: the beta of the company. Yet, these computational methods fail to take into account any preference the regulator might have to increase or decrease the beta to favour or punish investors or customers. We propose such a methodology based on what we call a Linex linear optimal method.

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Keywords

cost of capital, CAPM, linear predictor, linex

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Publisher

Faculty of Economics

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Sponsorship
ESRC research award 000-23-0400