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Portuguese Average Cost Of Capital

  • Costa, Jose Carlos
  • Mata, Maria Eugenia
  • Justino, David
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    The oldest Portuguese share index still being calculated is the BVL/PSI-General, one which started the daily series on 5/Jan/1988 with a base value of 1000 points. Everyday a single value is computed based on the closing prices of all the shares included in the sample. Also, all corporate events affecting the price of any share beyond market sentiment are taken into account through proper adjustments, either in the numerator or the denominator of the formula. However, for dates before January 1988, there is nothing comparable to this index since the two different series known either never disclosed the methodology adopted to calculate the index or followed solutions not compatible with the above index. The present paper explains the solutions adopted to replicate as closely as possible the methodology of the BVL-General index to the main market of the Lisbon Exchange for the period 1978 – 1987. This is the first estimate of the historical Equity Risk Premium in Portugal above short-term riskfree rate from the re-opening of the market following the Carnation Revolution (and the accompanying nationalizations), to the present. In showing a value of the same order of magnitude found in other countries, the paper invites further studies on the effects of political decisions such as privatizations and joining the European Union. JEL codes:

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    File URL: http://fesrvsd.fe.unl.pt/WPFEUNL/WP2009/wp543.pdf
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    Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp543.

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    Length: 34 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:unl:unlfep:wp543
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    1. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    2. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-76, July.
    3. William Goetzmann & Philippe Jorion, 1997. "A Century of Global Stock Markets," Yale School of Management Working Papers ysm53, Yale School of Management, revised 01 Aug 2000.
    4. G. William Schwert, 1997. "Stock Market Volatility: Ten Years After the Crash," Center for Financial Institutions Working Papers 97-51, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. John Y. Campbell & Samuel B. Thompson, 2005. "Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?," NBER Working Papers 11468, National Bureau of Economic Research, Inc.
    6. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
    7. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December.
    8. Brown, Stephen J & Goetzmann, William N & Ibbotson, Roger G, 1999. "Offshore Hedge Funds: Survival and Performance, 1989-95," The Journal of Business, University of Chicago Press, vol. 72(1), pages 91-117, January.
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