Is the Equity Risk Premium Compressed in Brazil?

Alexandre Carvalho and Thiago Trafane Oliveira Santos ()

No 527, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The ex-post or historical equity risk premium in Brazil is low compared to other countries. In this paper we seek to evaluate whether this is a result of a compressed ex-ante equity risk premium, using two different approaches. First, we investigate the effects of government-controlled shareholders, which could lower the risk premium if the government is also interested in nonpecuniary benefits. To verify this, we estimate the Brazilian equity risk premium from 2002 to 2017 using cross-section regressions based on the CAPM and the Gordon model, but supposing stocks are priced differently by government and private investors. An important feature of this approach is that we control for the possible impact of the government as firm’s manager on the perceived risk of the firm. Our results suggest the government does not compress the equity risk premium, although the government as a manager seems to influence the firms’ risk. Second, we decompose the Brazilian equity risk premium using a global CAPM estimated with quarterly data from 47 countries and find it is consistent with international risk premia. Therefore, the findings from the two approaches indicate the low ex-post risk premium in Brazil seems to be a consequence of a relatively short time series rather than a Brazilian idiosyncrasy.

Date: 2020-07
New Economics Papers: this item is included in nep-fmk and nep-upt
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Citations: View citations in EconPapers (1)

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