Huge Dispersion of the Risk-Free Rate and Market Risk Premium Used by Analysts in USA and Europe in 2015
14 Pages Posted: 3 Nov 2015 Last revised: 12 Oct 2017
Date Written: October 11, 2017
We look at the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used by analysts in 2015 to value companies of six countries.
The dispersion of both, the RF and the MRP used, is huge, and the most unexpected result is that the dispersion is higher for the RF than for the MRP.
We also find that some analysts have more freedom than others do. The data permits other comparisons. For example: Does it make sense that the average MRP used for Germany is higher than the average MRP used for France, Italy, Spain or the UK?
Most of the analysts use a RF higher than the yield of the 10-year Government bonds. A reason for it and for the huge dispersion may be the activity of the European Central Bank (ECB). The risk-free rate is the required return to Government bonds when nobody (not even the ECB) manipulates the market. A question arises: May we consider the Quantitative Easing (QE) implemented by the ECB in 2014 and 2015 “market abuse”, “market manipulation”, a way of “altering competitive markets”…?
Keywords: analyst, market risk premium; required equity premium; risk-free rate
JEL Classification: G12, G31, M21
Suggested Citation: Suggested Citation