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
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: Suggested Citation