An Empirical model of the international cost of equity

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2015
Uzunkaya, Mehmet
The aim of the study is to propose an empirical model of the international cost of equity by investigating and analyzing the long-run relation between disaggregated country risk ratings and country stock market index returns for a large panel of countries. The study tests the hypothesis that, given the available theoretical and empirical evidence, country risk ratings and country stock market index returns should move together in the long-run and there should be a long-run equilibrium between them; thus country risk ratings, with their forward-looking nature about the political, macroeconomic and financial fundamentals of a large number of countries, may behave as long-run state variables for stock returns to the extent they are undiversifiable internationally. The results of the analysis provide evidence in favor of the argument that disaggregated country risk ratings, in particular the political and economic risk ratings, are related to stock market returns in the long-run. Using this relation, an empirical model of the international cost of equity is proposed. The model takes country risk ratings as inputs and finds the international cost of equity for a specific country of known risk ratings.

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Citation Formats
M. Uzunkaya, “An Empirical model of the international cost of equity,” Ph.D. - Doctoral Program, Middle East Technical University, 2015.