Estimating the Market Risk Premium in New Zealand Through the Siegel Methodology

Accounting Research Journal, Vol. 17, No. 2, pp. 93-101, 2004

Posted: 12 Jan 2010

See all articles by Alastair Marsden

Alastair Marsden

University of Auckland - Business School

Martin Lally

Victoria University of Wellington

Date Written: 2004

Abstract

This paper estimates the standard and tax-adjusted market risk premiums in New Zealand using historical data between 1931-2002 and a variant of the Siegel (1992) methodology. Similar to Siegel we present evidence that real bond yields in New Zealand were low over the period 1931-2002 and this may bias upwards an Ibbotson-type estimate of the market risk premium. Using an estimate for the historical average of the expected real bond yield of .03-.04, then the Siegel-type estimate for the standard market risk premium in New Zealand is .03-.04, and the Siegel-type estimate for the tax-adjusted market risk premium is .055 to .062. These figures are about .02 lower than Ibbotson type estimates, and are also lower than estimates of the forward looking type. Our study has potential implications for the cost of equity capital and capital budgeting.

Keywords: Market risk premium, New Zealand, Siegel, Ibbotson-type estimate

JEL Classification: D53, G14, G32, C83

Suggested Citation

Marsden, Alastair D.E. and Lally, Martin, Estimating the Market Risk Premium in New Zealand Through the Siegel Methodology (2004). Accounting Research Journal, Vol. 17, No. 2, pp. 93-101, 2004. Available at SSRN: https://ssrn.com/abstract=1535034

Alastair D.E. Marsden

University of Auckland - Business School ( email )

Private Bag 92019
Room: C208
Auckland
New Zealand
64 9 373 7999 (Phone)
64 9 373 7406 (Fax)

Martin Lally (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington 6001
New Zealand
64 4 471 5365 (Phone)
64 4 495 5076 (Fax)

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