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Estimating the country risk premium in emerging markets: the case of the Republic of Macedonia

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  • Aleksandar Naumoski

    (Ss. Cyril and Methodius University Skopje, Faculty of Economics, Department of Management, Skopje, R. Macedonia)

Abstract

Estimation of the cost of capital is difficult in developed markets and even more difficult in emerging markets. Investments in the emerging markets are more risky than in the developed markets but return is also higher. The key question here is whether the return on investments in emerging markets should be rewarded by compensation in excess of that provided by an equivalent investment in a developed market. Contemporary literature provides alternative ways for calculating the cost of capital invested in emerging markets. In general, it can be concluded that it is widely accepted that country risk matters when investing in emerging markets and it is a key component in the estimation of the cost of capital for those investments. Country risk is non-diversifiable, which will be argued in this paper first, after which an alternative approach will be provided for quantification of country risk in the risk premium measure, which is integral component in the models for estimating the cost of capital.

Suggested Citation

  • Aleksandar Naumoski, 2012. "Estimating the country risk premium in emerging markets: the case of the Republic of Macedonia," Financial Theory and Practice, Institute of Public Finance, vol. 36(4), pages 413-434.
    • Handle: RePEc:ipf:finteo:v:36:y:2012:i:4:p:413-434
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    References listed on IDEAS

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    1. Eva R. Porras, 2011. "The Cost of Capital," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-29767-8, December.
    2. K. Geert Rouwenhorst, 1999. "Local Return Factors and Turnover in Emerging Stock Markets," Journal of Finance, American Finance Association, vol. 54(4), pages 1439-1464, August.
    3. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    4. François Longin & Bruno Solnik, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    6. Debora Revoltella & Fabio Mucci & Dubravko Mihaljek, 2010. "Properly pricing country risk: a model for pricing long-term fundamental risk applied to central and eastern European countries," Financial Theory and Practice, Institute of Public Finance, vol. 34(3), pages 219-245.
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    Cited by:

    1. S. Santhosh Kumar & Susheel M. A., 2014. "Country Risk And Risk Premium For Portfolio Investments: An Examination Of Brics Nations," Economy & Business Journal, International Scientific Publications, Bulgaria, vol. 8(1), pages 604-610.

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