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Estimating the Brazilian market premium

Author

Listed:
  • Walter Gonçalves Junior
  • Ricardo Ratner Rochman
  • William Eid Junior
  • Luciana Ribeiro Chalela

Abstract

Risky investments assume that profits are on average higher than those obtained from risk-free assets; this difference is traditionally called an equity risk premium. Its importance is unequivocal: for investors, when deciding on being exposed to the stock market's risks; for corporation managers, in project selection and even for government agencies when regulating utility company returns and supervising pension funds. However, this applicability requires trustworthy values to be used in the models. This paper analyses estimates obtained by three different approaches covering the period of January of 1996 to December of 2008. In the historical approach, the results vary from 5% to 7% for the IBrX and FGV-100 indexes; in the prospective approach (which reflects the expected premium) the result was 3.35%; finally, in the indirect approach (by market models), negative equity premiums were found, an unexpected but significant result.

Suggested Citation

  • Walter Gonçalves Junior & Ricardo Ratner Rochman & William Eid Junior & Luciana Ribeiro Chalela, 2011. "Estimating the Brazilian market premium," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 15(5), pages 931-954.
    • Handle: RePEc:abg:anprac:v:15:y:2011:i:5:889
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