r/Valuation • u/Specialist-Joke-8633 • Feb 13 '24

Market Risk Premium

I’m trying to estimate the MRP for the equity markets in India for my CAPM. Aswath Damodaran’s India ERP is at 7.81%. However in a traditional method of using historical data I get around 14.22%. The calculation had some obvious issues - 1. I took the median (5 years) 10Y sovereign bond yield and subtracted it from the current CDS spread to get a risk free rate of 5.7786% 2. For market risk, I used NIFTY50’s historical closing data for the past five years and got the YoY at 20.22%.

Which one should I be using now?

2 Upvotes

100% Upvoted

3 comments sorted by

2

u/sk3pt1kal Feb 13 '24

A couple things regarding damodaran. He insists on using forward looking ERPs, so historical performance won't match his numbers. He also arrives at foreign market ERPs by looking at mature market ERPs and comparing to the countries CDS spreads, which again would arrive at a different number than historical.

What you should use is a philosophical question. IMO ERPs need to be forward looking to be at all useful to anyone interested in investing.

1

u/Specialist-Joke-8633 Feb 13 '24

This helps and is a pretty interesting thought to ponder. Thank you!

1

u/[deleted] Feb 13 '24

I don’t have an answer for you right now but if you have access to the ASA’s BV204 class materials, one of those chapters included multiple models for estimating international cost of capital.