New paper says European ERPs approach 4% to 7%

BVWireIssue #109-4
October 26, 2011

Authors from the Technical Univ. of Munich have just posted their new whitepaper, “The Equity Risk Premium across European Markets: An Analysis Using the Implied Cost of Capital,” at SSRN.

“Using a large data set of companies from 16 European countries over the period between January 1994 and May 2011,” the authors’ summary says, “we estimate the equity risk premiums [ERPs] applying an implied cost of capital approach. We find estimates that are consistently larger than those in previous studies, ranging from 4.4% to 6.9% across countries. Our main conclusion is that a positive trend over our sample period is responsible for the high estimates in comparison to previous studies. The trend is accompanied by declining risk-free rates over our estimation period, suggesting a much greater stability in the absolute return on equity than often assumed by classical asset pricing models.”

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