Discussion paper

DP11831 The World We Live In: Local or Global?

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.


Koedijk, K and R Mahieu (2017), ‘DP11831 The World We Live In: Local or Global?‘, CEPR Discussion Paper No. 11831. CEPR Press, Paris & London. https://cepr.org/publications/dp11831