The expected market risk premium (MRP) is a crucial parameter for corporate valuations using risk-adjusted discount rates. Despite its importance, there is no consensus on its correct estimation. This book provides a conceptual review of several estimation methods focused on implied cost of capital but also including historical averages and return decomposition. In addition, these methods are applied in a comprehensive empirical study for six key equity markets (Canada, France, Germany, Japan, UK, and USA). While professionals predominantly rely on historical averages, the empirical results demonstrate that the expected MRP is volatile over time and related to the market price level particularly during the recent financial crisis. The findings suggest to reject the usage of unconditional historical averages and to apply conditional estimates according to the «Stichtagsprinzip» instead.
Frankfurt am Main, Berlin, Bern, Bruxelles, New York, Oxford, Wien, 2011. XXX, 444 pp., 79 tables, 70 graphs
Contents: Expected MRP estimation based on averages of ex-post returns – Expected MRP estimation based on equity valuation
models using analysts’ consensus estimates (implied cost of capital method) – Expected MRP estimation based on return decomposition
approach – Unconditional versus conditional expected MRP estimates for corporate valuations – Conditional expected MRP estimates
during the financial crisis.