Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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illiquid. This approach will understate the equity risk
premiums in those markets.



  1. Default spreads plus relative standard deviations. The
    country default spreads that come with country ratings
    provide an important first step, but still only measure the
    premium for defaultrisk. Intuitively, wewould expect the
    countryequity risk premium to be largerthan thecountry
    defaultriskspread.Toaddresstheissueofhowmuchhigher,
    welook atthevolatilityof theequitymarket ina country
    relativetothevolatilityofthecountrybondusedtoestimate
    thespread.Thisyieldsthefollowingestimateforthecountry
    equity risk premium:


Toillustrate,considerthecaseofBrazil.Asnotedearlier,the
dollar-denominatedbondsissuedbytheBraziliangovernment
trade with a default spread of 3.50 percent over the U.S.
Treasurybondrate.Theannualizedstandarddeviationinthe
Brazilianequityindexwas 36 percent,whiletheannualized
standard deviation in the Brazilian dollar-denominated
C-Bond was 27 percent.
20 Theresultingadditionalcountryequityriskpremiumfor
Brazil is:


Note that this country risk premium will increase if the
countryratingdropsoriftherelativevolatilityoftheequity
market increases. It is also in addition to the equity risk

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