The risk of infrastructure firms is driven by unique factors that cannot be well described by standard asset class factor models. We thus create a seven-factor model based on infrastructure-specific risk exposure, i.e., market risk, cash flow volatility, leverage, investment growth, term risk, default risk, and regulatory risk. We empirically test our model on a large dataset of U.S. infrastructure stocks in different subsectors (utility, telecommunication, and transportation) and over a long period of time (1980 to 2011). The new factor model is able to capture the variation of infrastructure returns better than the Fama/French three-factor or the Carhart four-factor models. Thus, our model helps to better determine the cost of capital of infrastructure firms, something that is increasingly relevant in light of the growing need for privately financed infrastructure projects.
- Semir Ben Ammar and Martin Eling
University of St. Gallen, Working Paper n°129
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