The Cost of Equity in Emerging Markets: A Downside Risk Approach

EFMA 2000 Athens, EFA 2000 London, FMA 2000 Edinburgh

20 Pages Posted: 17 Aug 1999

Date Written: August 2000

Abstract

Every company evaluating an investment project or an acquisition in an emerging market must not only estimate future cash flows but also an appropriate discount rate. Although not free from controversy, the cost of equity in developed markets is typically estimated with the CAPM. In emerging markets, however, betas and stock returns seem to be unrelated. This article argues that total risk, idiosyncratic risk, and some measures of downside risk are significantly related to emerging-market stock returns, and proposes to estimate costs of equity in these markets based on the semideviation with respect to the mean, a well-known measure of downside risk.

JEL Classification: G31, G32

Suggested Citation

Estrada, Javier, The Cost of Equity in Emerging Markets: A Downside Risk Approach (August 2000). EFMA 2000 Athens, EFA 2000 London, FMA 2000 Edinburgh. Available at SSRN: https://ssrn.com/abstract=170748 or http://dx.doi.org/10.2139/ssrn.170748

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
Spain
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

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