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Estimating Equity Risk Premiums

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  • Aswath Damodaran

Abstract

Equity risk premiums are a central component of every risk and return model in finance. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. The standard approach to estimating equity risk premiums remains the use of historical returns, with the difference in annual returns on stocks and bonds over a long time period comprising the expected risk premium, looking forward. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to limited and noisy. We suggest ways in which equity risk premiums can be estimated for these markets, using a base equity premium and a country risk premium. Finally, we suggest an alternative approach to estimating equity risk premiums that requires no historical data and provides updated estimates for most markets.

Suggested Citation

  • Aswath Damodaran, 1999. "Estimating Equity Risk Premiums," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-021, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:99-021
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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99021.pdf
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    References listed on IDEAS

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    Cited by:

    1. Samuel Mongrut Montalván & Didac Ramírez Sarrió, 2005. "Discount Rates in Emerging Capital Markets," Finance 0501013, EconWPA.
    2. 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.
    3. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian T. & Siegel, Stephan, 2016. "Political risk and international valuation," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 1-23.
    4. David Schröder, 2005. "The Implied Equity Risk Premium - An Evaluation of Empirical Methods," Bonn Econ Discussion Papers bgse13_2005, University of Bonn, Germany.

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