Damodaran publishes 2022 risk premiums

BVWire–UKIssue #35-1
February 1, 2022

The equity risk premium is a favorite topic of Aswath Damodaran (New York University Stern School of Business), who employs a forward-looking “implied” method in keeping with business valuation requirements, rather than the more common historical measures. He estimates the implied ERP to be 4.9% as of 1 January 2022 and reports the year-end estimates going back to 1960.

BVR includes Damodaran’s data as one broadly accepted result in the Cost of Capital Professional.

Each year, Damodaran posts a great amount of data on his website including risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. Business valuers around the world frequently cite his research, which has been accepted in expert testimony and financial reporting.

Damodaran also publishes regular commentary on his blog related to forward-looking cost of capital. Last week, he offered experts a new perspective on how current inflationary trends impact business valuation conclusions. (A post two weeks ago explains some of these risk premia data and gives the background of his annual analysis.)

To derive implied ERPs, Damodaran “backs this number out” from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond.

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