Country risk premium

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Country risk premium

Postby bhumika.k4295 » Wed Jun 15, 2016 4:34 pm

What is a aanualised std. deviation of equity index of developing country and developed country?

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Re: Country risk premium

Postby edupristine » Mon Jun 20, 2016 11:45 am

Hi Bhumika

As per calculating country risk premium......

The use of a stock's beta to capture the country risks of a project is well supported in empirical studies that examine developed nations. However, beta does not appear to adequately capture country risk for companies in developing nations . A common approach for dealing with this problem is to adjust the cost of equity estimated using the CAPM by adding a country spread to the market risk premium. The country spread is also referred to as a country equity premium. Perhaps the simplest estimate of the country spread is the sovereign yield spread, which is the difference between the government bond yield in that country, denominated in the currency of a developed country, and the Treasury bond yield on a similar maturity bond in the developed country. However, this approach may be too coarse for the purposes of equity risk premium estimation. Another approach is to calculate the country equity premium as the product of the sovereign yield spread and the ratio of the volatility of the developing country equity market to that of the sovereign bond market denominated in terms of the currency of a developed country.

CRP= sovereign yield spread*(SD of developing country’s equity index/SD of developed country’s bond market)

The annualized standard deviation of the sovereign bond market in terms of the developing country’s currency is not part of the equity premium calculation.

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