The Portuguese Equity Risk Premium
Rui M. Alpalhão
Instituto Superior das Ciencias do Trabalho e da Empresa (ISCTE) - Finance & Accounting
Paulo F. Pereira Alves
Lusofona University and ISCAL
March 24, 2004
Instituto Superior das Ciencias do Trabalho e da Empresa Working Paper No. 1/2002
Estimates of appropriate equity risk premiums are abundant in finance textbooks. Unfortunately, these estimates are ill suited to small and data scarce markets such as the Portuguese. We review the literature to select techniques to overcome this difficulty, and produce estimates of equity risk premiums suited to the Portuguese market. We compute historical equity premiums and find what we believe to be a better understanding of the subject with the help of the Godfrey-Espinosa approach and of implied risk premiums. We apply the Godfrey-Espinosa model to a number of other European markets, and conclude that the Portuguese market implies a higher exposure to risk, namely when compared to other Euronext member markets. We conclude that the valuation of Portuguese equities should carry a higher risk premium than the ones generally suggested in finance textbooks, and that the merger of the Lisbon Stock Exchange with Euronext should lead to a reduction in the appropriate risk premiums for Portuguese blue chips.
Number of Pages in PDF File: 20
Keywords: Equity Risk Premium
JEL Classification: G12, G31working papers series
Date posted: July 2, 2009
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