The Portuguese Equity Risk Premium

Instituto Superior das Ciencias do Trabalho e da Empresa Working Paper No. 1/2002, Applied Financial Economics

20 Pages Posted: 2 Jul 2009 Last revised: 5 Dec 2014

See all articles by Rui M. Alpalhão

Rui M. Alpalhão

Instituto Superior das Ciencias do Trabalho e da Empresa (ISCTE) - Finance & Accounting

Paulo F. Pereira Alves

CMVM - Portuguese Securities and Exchange Commission, ISCAL and Lusofona University

Date Written: March 24, 2004

Abstract

Estimates of appropriate equity risk premiums are abundant in finance textbooks. Unfortunately, these estimates are ill suited to small and data scarce markets such as the Portuguese. We review the literature to select techniques to overcome this difficulty, and produce estimates of equity risk premiums suited to the Portuguese market. We compute historical equity premiums and find what we believe to be a better understanding of the subject with the help of the Godfrey-Espinosa approach and of implied risk premiums. We apply the Godfrey-Espinosa model to a number of other European markets, and conclude that the Portuguese market implies a higher exposure to risk, namely when compared to other Euronext member markets. We conclude that the valuation of Portuguese equities should carry a higher risk premium than the ones generally suggested in finance textbooks, and that the merger of the Lisbon Stock Exchange with Euronext should lead to a reduction in the appropriate risk premiums for Portuguese blue chips.

Keywords: Equity Risk Premium

JEL Classification: G12, G31

Suggested Citation

Alpalhão, Rui M. and Pereira Alves, Paulo F., The Portuguese Equity Risk Premium (March 24, 2004). Instituto Superior das Ciencias do Trabalho e da Empresa Working Paper No. 1/2002, Applied Financial Economics, Available at SSRN: https://ssrn.com/abstract=1427893 or http://dx.doi.org/10.2139/ssrn.1427893

Rui M. Alpalhão

Instituto Superior das Ciencias do Trabalho e da Empresa (ISCTE) - Finance & Accounting ( email )

Complexo Indeg/Iscte
Av. Professor Anibal Bettencourt
Lisboa, 1600-189
Portugal
+351217958607 (Phone)
+351217958605 (Fax)

Paulo F. Pereira Alves (Contact Author)

CMVM - Portuguese Securities and Exchange Commission, ISCAL and Lusofona University ( email )

Rua Laura Alves n.º 4 Apartado 14258
Lisbon
Portugal