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Expert Estimates of 2017 Country Equity Risk Premiums and Risk-free Rates

Posted in Economic Indicators, Equity Premium

What are current estimates of equity risk premiums (ERP) and risk-free rates around the world? In their April 2017 paper entitled “Discount Rate (Risk-Free Rate and Market Risk Premium) Used for 41 Countries in 2017: A Survey”, Pablo Fernandez, Vitaly Pershin and Isabel Acin summarize results of a March 2017 email survey of international finance/economic professors, analysts and company managers “about the Market Risk Premium (MRP) or Equity Premium used to calculate the required return to equity in different countries.” Based on 4,368 specific and credible responses spanning 41 countries with at least 25 such responses, they find that:

  • Across all 41 countries, average ERP estimates range from 5.6% for New Zealand to 17.4% for Venezuela (see the chart below). Average risk-free rate estimates range from 0.3% for Japan to 11.5% for Venezuela.
  • About 38% of responses are for the U.S. The average (median) ERP estimate for the U.S. is 5.7% (5.7%). The average (median) risk-free rate estimate for the U.S. is 2.5% (2.5%).
  • Weighting all 41 countries equally, the average worldwide ERP is 7.7%.

The following chart, constructed from data in the paper, summarizes average ERP estimates for the 41 countries with at least 25 responses from finance/economic professors, analysts and company managers. The order is from lowest to highest average estimated ERP.

In summary, average local equity risk premiums (risk-free rates) for 2017 based on responses to a survey of international professors, analysts and company managers range from 5.6% to 17.4% (0.3% to 11.5%) across 41 countries.

Cautions regarding findings include:

  • 25 is not a large sample. Only 18 (5) countries have at least 50 (100) responses.
  • Standard deviations (uncertainties) of ERP estimates vary considerably by country.
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