Business, Management and Accounting
4 years ago

Federal Reserve Banks' Cost of Equity Capital Estimates Refined for Accuracy.

Journal of Banking & Finance
Alternative measures of the Federal Reserve Banks’ cost of equity capital
Michelle L. Barnes, Jose A. Lopez

Paper Summary

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The Federal Reserve Banks need to figure out how much it costs them to provide payment services, including a cost of equity capital. Different methods were used to estimate this cost, but the basic CAPM model with a big group of similar companies gave the most accurate result. Narrowing down the group or adding more factors didn't make a big difference. So, using the standard CAPM model is a good way to estimate the cost of equity capital for the Federal Reserve Banks.