International Asset Pricing: Evidence from the Cross Section of Implied Cost of Capital

48 Pages Posted: 15 Jan 2004

See all articles by Charles M.C. Lee

Charles M.C. Lee

Foster School of Business, University of Washington; Stanford University - Graduate School of Business

David T. Ng

Johnson College of Business

Bhaskaran Swaminathan

LSV Asset Management

Date Written: November 1, 2003

Abstract

This study presents a new methodology for estimating international cost of capital. Using a discounted cash flow model, we estimate market implied risk premia for firms in the G-7 countries during the 1990 to 2000 time period. We find that the average risk premia in G-7 countries typically fall within a narrow range of 2% to 4%, and that risk premia are consistently higher for some countries and industries. Variables most useful in explaining cross-sectional variation in implied risk premia are return volatility, size, B/M ratio, analyst growth forecast, and lagged industry-country risk premia. Together, these variables explain 20% to 30% of the cross-sectional variation in international risk premia. Interestingly, beta measures from various international asset pricing models have little explanatory power, while betas corresponding to empirical size and book-to-market factors do much better.

Suggested Citation

Lee, Charles M.C. and Ng, David T. and Swaminathan, Bhaskaran, International Asset Pricing: Evidence from the Cross Section of Implied Cost of Capital (November 1, 2003). Available at SSRN: https://ssrn.com/abstract=485762 or http://dx.doi.org/10.2139/ssrn.485762

Charles M.C. Lee (Contact Author)

Foster School of Business, University of Washington ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Stanford University - Graduate School of Business

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States

David T. Ng

Johnson College of Business ( email )

301G Warren Hall, Cornell University
Ithaca, NY 14850-1967
United States
6072550145 (Phone)

Bhaskaran Swaminathan

LSV Asset Management ( email )

155 North Wacker Drive
Chicago, IL 60606
United States

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