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Title: The Cost of Capital in International Financial Markets: Local or Global

Author(s): Kees Koedijk, Clemens J. M. Kool, Peter C Schotman and Mathijs A Van Dijk

Publication Date: November 2001

Keyword(s): cost of capital, exchange rate exposure, icapm and pricing error

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: This Paper analyses to what extent international and domestic asset pricing models lead to a different estimates of the cost of capital for an individual firm. We distinguish between (i) the multifactor ICAPM of Solnik (1983) and Sercu (1980) including both the global market portfolio and exchange rate risk premiums, and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 3,293 stocks from nine countries in the period 1980-99. We find that the domestic CAPM yields a different estimate of the cost of capital from the multifactor ICAPM for only three percent of the firms in our sample. The difference amounts to on average 50 basis points for the US, 75 basis points for Germany and Japan and similar differentials for the other countries. We attribute these findings to strong country factors in individual stock returns.

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Bibliographic Reference

Koedijk, K, Kool, C, Schotman, P and Van Dijk, M. 2001. 'The Cost of Capital in International Financial Markets: Local or Global'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3062