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Estimation Of Discount Rates In Latin America: Empirical Evidence And Challenges

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  • Fuenzalida, Darcy

    () (Departmento de Industrias Universidad Federico Santa Maria, Chile)

  • Mongrut, Samuel

    () (EGADE-ZC Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM))

Abstract

This paper compares the main proposals that have been made in order to estimate discount rates in emerging markets. Seven methods are used to estimate the cost of equity capital in the case of global well-diversified investors; two methods are used to estimate it in the case of imperfectly diversified local institutional investors; and one method is used to estimate the required return in the case of non-diversified entrepreneurs. Using the first nine methods, one estimates the costs of equity for all economic sectors in six Latin American emerging markets. Consistently with studies applied to other regions, a great deal of disparity is observed between the discount rates obtained across the different models, which implies that no model is better than the others. Likewise, the paper shows that Latin American markets are in a process of becoming more integrated with the world market because discount rates have decreased consistently during the first five-year period of the XXI Century. Finally, one identifies several challenges that have to be tackled to estimate discount rates and valuate investment opportunities in emerging markets.

Suggested Citation

  • Fuenzalida, Darcy & Mongrut, Samuel, 2010. "Estimation Of Discount Rates In Latin America: Empirical Evidence And Challenges," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 15(28), pages 7-43.
  • Handle: RePEc:ris:joefas:0014
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    References listed on IDEAS

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    12. Jaime Sabal, 2004. "The Discount Rate in Emerging Markets: A Guide," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(2-3), pages 155-166.
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    Cited by:

    1. Guanais, Luiz Felipe Poli & Sanvicente, Antonio Zoratto & Sheng, Hsia Hua, 2017. "Cost of equity estimation for the Brazilian market: a test of the Goldman Sachs model," Textos para discussão 447, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    2. repec:eee:labeco:v:46:y:2017:i:c:p:26-46 is not listed on IDEAS
    3. Tejada, Mauricio M., 2016. "Lifetime inequality measures for an emerging economy: The case of Chile," Labour Economics, Elsevier, vol. 42(C), pages 1-15.
    4. Fuenzalida, Darcy & Mongrut, Samuel & Arteaga, Jaime Raúl & Erausquin, Alexander, 2013. "Good corporate governance: Does it pay in Peru?," Journal of Business Research, Elsevier, vol. 66(10), pages 1759-1770.

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    Keywords

    Discount rates; cost of equity; emerging market;

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