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Expert Estimates of 2019 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 March 2019 paper entitled “Market Risk Premium and Risk-free Rate Used for 69 Countries in 2019: A Survey”, Pablo Fernandez, Mar Martinez and Isabel Acin summarize results of a February-March 2019 email survey of international finance/economic professors, analysts and company managers “about the Market Risk Premium (MRP or Equity Premium) and Risk-Free Rate that companies, analysts, regulators and professors use to calculate the required return on equity in different countries.” Results are in local currencies. Based on 5,096 specific and credible premium estimates spanning 69 countries with more than eight such responses, they find that:

  • Across all 69 countries:
    • Average ERP estimates range from 5.6% for the U.S. to 23.7% for Venezuela.
    • Weighting all 69 countries equally, the average worldwide ERP is 8.1%.
    • Average risk-free rate estimates range from 1.1% for Japan to 25.0% for Nigeria.
    • Average overall required equity return estimates range from 6.8% for Germany to 36.3% for Venezuela (see the chart below).
  • For the U.S. only (23% of responses)
    • Average (median) ERP estimate is 5.6% (5.5%).
    • Average (median) risk-free rate estimate is 2.7% (2.8%).

The following chart, constructed from data in the paper, summarizes average equity return (ERP plus risk-free rate) estimates in local currencies for the 69 countries with more than eight responses from finance/economic professors, analysts and company managers. The order is from lowest to highest average estimated return.

In summary, average local returns to equity (ERP plus risk-free rate) for 2019 based on responses to an international survey of professors, analysts and company managers range from 6.8% to 36.3% across 69 countries.

Cautions regarding findings include:

  • Many country sample sizes are very small for computing statistics. Only 22 (12) countries have at least 50 (100) estimates.
  • Standard deviations (uncertainties) of ERP estimates vary considerably by country.
  • Since results are in local currencies, an investor in one country seeking equity positions in another country would need to take into account expected change in the associated exchange rate over the equity holding period. Neither the equity premium forecast nor the exchange rate forecast may be accurate.

See results of this search for summaries of recent-year iterations of this survey report.

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