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Cross-border valuation using the International CAPM and the constant perpetual growth model

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  • O’Brien, Thomas J.

Abstract

For cross-border valuation to be consistent with the International CAPM (ICAPM), translating projected cash flows across currencies should account for a currency risk premium and the economic interaction between uncertain cash flows and uncertain exchange rates. The conventional translation method ignores these items. This study proposes a translation method that is consistent with the ICAPM, given the constant perpetual growth model of valuation. Using empirical data, the study illustrates the conventional translation method’s potentially substantial valuation error if the ICAPM describes the risk-return trade-off in financial markets.

Suggested Citation

  • O’Brien, Thomas J., 2022. "Cross-border valuation using the International CAPM and the constant perpetual growth model," Journal of Economics and Business, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:jebusi:v:119:y:2022:i:c:s0148619521000606
    DOI: 10.1016/j.jeconbus.2021.106042
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    References listed on IDEAS

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    More about this item

    Keywords

    Cross-border valuation; Exchange rates; Currency risk premium; International CAPM;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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