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The cost of equity for global banks: a CAPM perspective from 1990 to 2009

  • Michael R King

This article provides estimates of the inflation-adjusted cost of equity for banks in six countries over the period 1990-2009. This cost is estimated using the single-factor capital asset pricing model (CAPM), where expected stock returns are a function of risk-free rates and a bank-specific risk premium. Cost of equity estimates declined steadily across all countries from 1990 to 2005 but then rose from 2006 onwards. The fall in the cost of equity reflects (i) the decrease in risk-free rates over this period, and (ii) a decline in the sensitivity of bank stock returns to market risk (the CAPM beta) in all countries except Japan. The estimates show wide variation across banks, highlighting the difficulty of estimating expected returns using the CAPM.

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Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2009)
Issue (Month): (September)

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Handle: RePEc:bis:bisqtr:0909g
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  1. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  2. Michelle L. Barnes & Jose Lopez, 2005. "Alternative measures of the Federal Reserve banks' cost of equity capital," Working Paper Series 2005-06, Federal Reserve Bank of San Francisco.
  3. Jeremy C. Stein, 1996. "Rational Capital Budgeting in an Irrational World," NBER Working Papers 5496, National Bureau of Economic Research, Inc.
  4. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  5. J. Bradford DeLong & Konstantin Magin, 2009. "The U.S. Equity Return Premium: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 193-208, Winter.
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