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The Cost of Capital in International Financial Markets: Local or Global

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  • Koedijk, Kees
  • Kool, Clemens J. M.
  • Schotman, Peter C
  • Van Dijk, Mathijs A

Abstract

This Paper analyses to what extent international and domestic asset pricing models lead to a different estimates of the cost of capital for an individual firm. We distinguish between (i) the multifactor ICAPM of Solnik (1983) and Sercu (1980) including both the global market portfolio and exchange rate risk premiums, and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 3,293 stocks from nine countries in the period 1980-99. We find that the domestic CAPM yields a different estimate of the cost of capital from the multifactor ICAPM for only three percent of the firms in our sample. The difference amounts to on average 50 basis points for the US, 75 basis points for Germany and Japan and similar differentials for the other countries. We attribute these findings to strong country factors in individual stock returns.

Suggested Citation

  • Koedijk, Kees & Kool, Clemens J. M. & Schotman, Peter C & Van Dijk, Mathijs A, 2001. "The Cost of Capital in International Financial Markets: Local or Global," CEPR Discussion Papers 3062, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3062
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    Cited by:

    1. El Hedi Arouri, Mohamed & Rault, Christophe & Sova, Anamaria & Sova, Robert & Teulon, Frédéric, 2013. "Market structure and the cost of capital," Economic Modelling, Elsevier, vol. 31(C), pages 664-671.
    2. João Sousa Andrade, 2006. "Mobilidade do Capital e Sustentabilidade Externa: uma aplicação da tese de F-H a Portugal (1910-2004)," GEMF Working Papers 2006-04, GEMF, Faculty of Economics, University of Coimbra.
    3. Koedijk, Kees & Mahieu, Ronald J & ter Horst, Jenke & van Toor, Joris, 2017. "The World We Live In: Local or Global?," CEPR Discussion Papers 11831, C.E.P.R. Discussion Papers.
    4. Warnes, Ignacio & Warnes, Pablo E., 2014. "Country risk and the cost of equity in emerging markets," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 15-27.
    5. Boamah, Nicholas Addai & Loudon, Geoffrey & Watts, Edward J., 2017. "Structural breaks in the relative importance of country and industry factors in African stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 79-88.
    6. Billio, M. & Donadelli, M. & Paradiso, A. & Riedel, M., 2017. "Which market integration measure?," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 150-174.
    7. Bruner, Robert F. & Li, Wei & Kritzman, Mark & Myrgren, Simon & Page, Sébastien, 2008. "Market integration in developed and emerging markets: Evidence from the CAPM," Emerging Markets Review, Elsevier, vol. 9(2), pages 89-103, June.
    8. Mehmet Balcilar & Riza Demirer & Shawkat Hammoudeh & Ahmed Khalifa, 2013. "Do Global Shocks Drive Investor Herds in Oil-Rich Frontier Markets?," Working Papers 819, Economic Research Forum, revised Dec 2013.
    9. repec:eee:quaeco:v:65:y:2017:i:c:p:88-96 is not listed on IDEAS
    10. Kolari, James W. & Moorman, Ted C. & Sorescu, Sorin M., 2008. "Foreign exchange risk and the cross-section of stock returns," Journal of International Money and Finance, Elsevier, vol. 27(7), pages 1074-1097, November.
    11. Du, Ding & Hu, Ou, 2015. "The world market risk premium and U.S. macroeconomic announcements," Journal of International Money and Finance, Elsevier, vol. 58(C), pages 75-97.
    12. Balvers, Ronald J. & Klein, Alina F., 2014. "Currency risk premia and uncovered interest parity in the International CAPM," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 214-230.
    13. Grandes, Martin & Panigo, Demian T. & Pasquini, Ricardo A., 2010. "On the estimation of the cost of equity in Latin America," Emerging Markets Review, Elsevier, vol. 11(4), pages 373-389, December.
    14. 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.
    15. Boamah, Nicholas Addai, 2017. "The dynamics of the relative global sector effects and contagion in emerging markets equity returns," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 433-453.
    16. Walter Dolde & Carmelo Giaccotto & Dev R. Mishra & Thomas O'Brien, 2012. "Should managers estimate cost of equity using a two-factor international CAPM?," Managerial Finance, Emerald Group Publishing, vol. 38(8), pages 708-728, June.
    17. Su, EnDer & Fen, Yu-Gin, 2011. "Applying the structural equation model rule-based fuzzy system with genetic algorithm for trading in currency market," MPRA Paper 35474, University Library of Munich, Germany.
    18. Pereiro, Luis E., 2006. "The practice of investment valuation in emerging markets: Evidence from Argentina," Journal of Multinational Financial Management, Elsevier, vol. 16(2), pages 160-183, April.
    19. He, Zhongzhi & Kryzanowski, Lawrence, 2007. "Cost of equity for Canadian and U.S. sectors," The North American Journal of Economics and Finance, Elsevier, vol. 18(2), pages 215-229, August.
    20. Frijns, Bart & Tourani-Rad, Alireza & Indriawan, Ivan, 2012. "Political crises and the stock market integration of emerging markets," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 644-653.
    21. Krapl, Alain & Giaccotto, Carmelo, 2015. "Foreign exchange risk and the term-structure of industry costs of equity," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 71-88.
    22. João Sousa Andrade, 2007. "La these de Feldstein-Horioka: une mesure de la mobilité internationale du capital," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 54(1), pages 53-67, March.
    23. Han, Yufeng, 2012. "State uncertainty in stock markets: How big is the impact on the cost of equity?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2575-2592.
    24. Yamani, Ehab A. & Swanson, Peggy E., 2014. "Financial crises and the global value premium: Revisiting Fama and French," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 115-136.

    More about this item

    Keywords

    cost of capital; exchange rate exposure; icapm; pricing error;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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