International Asset Pricing: Evidence from the Cross Section of Implied Cost of Capital
Preprint
- 1 November 2003
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
This study presents a new methodology for estimating international cost of capital. Using a discounted cash flow model, we estimate market implied risk premia for firms in the G-7 countries during the 1990 to 2000 time period. We find that the average risk premia in G-7 countries typically fall within a narrow range of 2% to 4%, and that risk premia are consistently higher for some countries and industries. Variables most useful in explaining cross-sectional variation in implied risk premia are return volatility, size, B/M ratio, analyst growth forecast, and lagged industry-country risk premia. Together, these variables explain 20% to 30% of the cross-sectional variation in international risk premia. Interestingly, beta measures from various international asset pricing models have little explanatory power, while betas corresponding to empirical size and book-to-market factors do much better.Keywords
This publication has 21 references indexed in Scilit:
- Idiosyncratic Risk Matters!The Journal of Finance, 2003
- Inferring the Cost of Capital Using the Ohlson–Juettner ModelReview of Accounting Studies, 2003
- Expectations of Equity Risk Premia, Volatility and Asymmetry from a Corporate Finance PerspectivePublished by National Bureau of Economic Research ,2001
- Toward an Implied Cost of CapitalJournal of Accounting Research, 2001
- An International Dynamic Asset Pricing ModelPublished by National Bureau of Economic Research ,1999
- The Finite Horizon Expected Return ModelCFA Magazine, 1997
- Sources of risk and expected returns in global equity marketsJournal of Banking & Finance, 1994
- The Risk and Predictability of International Equity ReturnsThe Review of Financial Studies, 1993
- Common risk factors in the returns on stocks and bondsJournal of Financial Economics, 1993
- Estimating Shareholder Risk Premia Using Analysts' Growth ForecastsFinancial Management, 1992