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2014 Country Equity Risk Premiums from Academia and Practitioners

Posted in Equity Premium

What are the current academic and practitioner estimates of annual premiums over the risk-free rate demanded in each country by equity investors? In their June 2014 paper entitled “Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers”, Pablo Fernandez, Pablo Linares and Isabel Fernandez Acin summarize the results of a May-June 2014 email survey “about the Market Risk Premium (MRP or Equity Premium) that companies, analysts and professors use to calculate the required return on equity in different countries.” Based on 2,022/1,278/1,803/1,968 specific responses to the question from professors/analysts/financial companies/non-financial companies, respectively, around the world, they find that:

  • Average equity risk premium estimates range from 4.8% for Liechtenstein to 15% for Greece (see the chart below).
  • Median estimates range from 5.0% for several developed markets (including Canada, Denmark, Germany, Japan, Netherlands, Sweden, Switzerland, UK and U.S.) to 15.6% for Venezuela and 16.5% for Greece.
  • The average (median) estimate for the U.S. is 5.4% (5.0%).
  • Weighting each country equally, the average worldwide equity risk premium is about 8%.
  • Where comparisons are possible, 40% (27%) of average (median) country equity risk premium estimates for 2014 are higher than those for 2013, and 56% (60%) are lower.
  • The most commonly cited sources of equity risk premiums are Damodaran, internal estimates, historical data and Ibbotson/Morningstar.

The following chart, constructed from data in the paper, summarizes average and median survey-based equity risk premiums (ERP) by country, with variability ranges of one standard deviation around the average. The order is from lowest to highest average ERP.

country-ERPs-2014

In summary, average equity risk premiums (required returns to equity above the risk-free rate) by country for 2014 from a broad survey of professors, analysts and companies range from about 5.0% to about 16% across 88 countries.

Cautions regarding findings include:

  • The authors do not provide subsample sizes by country. Many subsamples are probably very small.
  • Standard deviations (uncertainties) for equity risk premium estimates vary considerably by country.
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