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Equity Risk Premium Estimation - A Critique of Current Approaches

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  • Anamaria CIOBANU

Abstract

From the perspective of the practitioners the huge amount of literature around the estimation of equity risk premium is more than annoying. The increasing complexity of the models proposed by researchers to assure a better estimation of equity risk premium, make them difficult to be understood by the practitioners and even more challenging to be applied in practice. With all this huge literature available about different possible ways to estimate the expected equity risk premium at their disposal, the CFO's option for old Capital Asset Pricing Model (CAPM) - so much criticized in scientific circles - is contradictory (as Graham and Harvey (2001, 2007) reflected in their survey). As practitioners will continue to use simple rules of thumb this gap between theory and practice will maintain the puzzle regarding what is the real or correct value of equity risk premium to consider in investments valuation. The main objective of the study is to identify the main arguments of the equity risk premium puzzle and to present the main options the appraisers have when they make the cost of capital estimation.

Suggested Citation

  • Anamaria CIOBANU, 2009. "Equity Risk Premium Estimation - A Critique of Current Approaches," The Valuation Journal, The National Association of Authorized Romanian Valuers, vol. 4(2), pages 48-67.
    • Handle: RePEc:vaj:journl:v:4:y:2009:i:2:p:48-67
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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