premium for a mature market. Thus, the total equity risk
premium forBrazil using theapproachand a 4.84percent
premium for the United States would be 9.51 percent.
Why shouldequityriskpremiums haveanyrelationshipto
country bond spreads? A simple explanation is that an
investorwhocanmake7.75percentonadollar-denominated
Braziliangovernmentbondwouldnotsettleforanexpected
returnof 7.5percent (in dollarterms) onBrazilian equity.
Both this approach and theprevious one use the standard
deviationin equityof amarket to makea judgment about
countryriskpremium,buttheymeasureitrelativetodifferent
bases.Thisapproachusesthecountrybondasabase,whereas
the previous one uses the standard deviation in the U.S.
market.Thisapproachassumesthatinvestorsaremorelikely
tochoosebetweenBraziliangovernmentbondsandBrazilian
equity, whereas the previous approach assumes that the
choice is across equity markets.
The threeapproaches to estimating country risk premiums
will generally give us different estimates, with the bond
default spread and relative equity standard deviation
approaches yielding lower country risk premiumsthan the
melded approach that uses both the country bond default
spread andtheequityand bondstandarddeviations. Inthe
caseofBrazil,forinstance,thecountryriskpremiumsrange
from3.5 percentusingthedefaultspread approachto 4.67
percentforthecountrybondapproach.Webelievethatthe
larger country risk premiums that emerge from the last
approacharethemostrealisticfortheimmediatefuture,but
country risk premiums may decline over time. Just as
companiesmatureandbecomelessriskyovertime,countries
can mature and become less risky as well.