Citation

Discussion Paper Details

Please find the details for DP11831 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The World We Live In: Local or Global?

Author(s): Kees Koedijk, Ronald J Mahieu, Jenke ter Horst and Joris van Toor

Publication Date: February 2017

Keyword(s): CAPM, Cost of Equity, International Capital Markets and International CAPM

Programme Area(s): Financial Economics

Abstract: In this paper, we document economically and statistically large differences in the cost of equity by comparing an international CAPM to a domestic CAPM. We consider fifteen countries over a nearly twenty-year period (1996 -2015). While the application of the international version of the CAPM in cases where an international market index is used as a pricing factor would seem justified by increased capital market integration, the empirical evidence on this has been inconclusive to date. We found that the average difference in the cost of equity between the models was equal to 0.77%, which represents about 20% of the historical risk premium. Moreover, for almost 20% of the companies, this difference in cost of equity is also statistically significant. For these companies the difference in cost of equity is equal to 1.49%. We therefore conclude that the ICAPM is increasingly becoming the relevant model for cost of equity calculations.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11831

Bibliographic Reference

Koedijk, K, Mahieu, R, ter Horst, J and van Toor, J. 2017. 'The World We Live In: Local or Global?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11831