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Cost of Equity Capital and Country Risk: An econometric analysis of the expected rate of return for four Latin American countries

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  • Juan Pablo Domínguez H.

    () (Universidad de Antioquia. Colombia)

Abstract

Expected returns and risk assessment are important issues when evaluating capital investment projects. We use VARX-MGARCH models and asset pricing theory to model the expected rate of return in Brazil, Colombia, Mexico and Peru for late 2006. The main objective of this paper is to present an econometric study of the cost of equity1 capital based upon Erb, Campbell, Harvey, and Viskanta (1996) modelling in emerging markets through country risk. We use MSCI’s DTR for measuring market performance and J.P. Morgan’s EMBI+spread to proxy country risk and then construct conditional mean and variance models in a univariate and multivariate context.

Suggested Citation

  • Juan Pablo Domínguez H., 2007. "Cost of Equity Capital and Country Risk: An econometric analysis of the expected rate of return for four Latin American countries," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 32(23), pages 63-90, january-j.
  • Handle: RePEc:ula:econom:v:32:y:2007:i:23:p:63-90
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    More about this item

    Keywords

    Financial econometrics; GARCH models; asset pricing; investment; cost of capital; country risk; equity returns.;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G - Financial Economics
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • F - International Economics
    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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