by Tamara Ayrapetova, on Sep 15, 2016 3:49:03 PM
CAPM is one of the most acknowledged and widely used models for equity cost estimation. However, measuring the cost of equity in the emerging markets sets new challenges that call into question its reliability for this specific region.
In the past 20 years emerging markets have gained extreme importance in international markets and have become one of the regions where new opportunities are to be found. With GDP growth and productivity growth slowing down in the 'advanced' economies, emerging markets are commonly viewed as the place for positive future economic prospects.
Moreover, liberalization of trade and free movement of capital have allowed financial institutions, companies and individual investors to consider these places as possible assets in their portfolios. As the results of such shifts, the tools and methods used by the businesses/financial institutions as well as individual investors who are using emerging markets either as diversification tool or as a main stream of income, have had to also be adjusted.
During this workshop, we considered different approaches of business valuation, keeping in mind the specific settings of emerging markets such as high returns volatility. We focused our attention on the problem of estimation of cost of equity for these countries; specifically we examined such measures as the CAPM model by evaluating their assumptions and variables.
In conclusion, alternative models such as Local CAPM, International CAPM, Godfrey and Espinosa Model and Estrada Simple Approach were presented and their limitations discussed in detail.
Author: Tamara Ayrapetova
Date: 1 April 2016
Major/Field: Corporate Finance, Business Valuation
Type: Faculty Research Seminar
Related Articles: This article will be published in a forthcoming issue of CRIS Bulletin.
