‘This is a good time to revisit the implied ERP rather than the historical ERP,’ advises Dr. Michael A. Crain (Florida Atlantic University). ‘The implied ERP reacts to changes in the risk-free rate but the long-term historical average ERP changes very little.’ As in the UK, risk-free rates are now in uncharted territory as the entire yield curve for U.S. bonds fell below 1% for the first time in history.

Ron Seigneur (Seigneur Gustafson LLP) offers this word of caution: ‘Much like the manufactured rate drop during the great recession to help the economy, using a build-up model with these low “risk-free” rates, keeping all else equal, creates an illusion of value that does not exist.’ He says, ‘Overall market risk is increasing in most sectors, as is volatility risk, so the analyst needs to make up the delta elsewhere.’

Crain and Seigneur are product leaders on BVR’s Cost of Capital Professional.

Those looking for global premia can turn to the just-released survey of the market risk premium (MRP) and risk-free rate (RF) used in 81 countries from Pablo Fernandez, professor of finance, IESE Business School. ‘Many respondents use a RF higher than the yield of the 10-year Government bonds for European countries,’ comments Fernandez this year.

The updated results also link to Fernandez’s previous annual surveys, from 2008 to 2019.