An asymmetric approach to the cost of equity estimation: empirical evidence from Russia

Yury Dranev and Sofya Fomkina

HSE Working papers from National Research University Higher School of Economics

Abstract: The choice of an appropriate model for the estimation of the cost of equity in emerging markets is still a very challenging problem. Market inefficiency, limited opportunities for diversification, as well as liquidity issues inspire researches to look for risk characteristics beyond the traditional framework of the classical capital asset pricing model. Various models have been developed over the past several decades proposing new ways of risk assessment. However, the empirical evidence of these models requires careful consideration. Most asset pricing models were developed in terms of either a symmetric mean-variance or a folded mean-semivariance framework. These models have several drawbacks in capturing investors’ attitudes to stock price movements. We provide a brief description of the recently proposed entropic risk characteristics which assign greater weight to the downside movements of asset prices and smaller weight to the upside movements. The goal of this study is to determine which model has better explanatory power for returns in the Russian capital market. We compare the performance of risk measures in the Russian stock market on a dataset of 63 stocks for the period from 2003 to 2012. Empirical results show certain advantages of entropic risk characteristics over other risk measures in explaining returns on Russian equities.

Keywords: rate of return; cost of equity; CAPM; entropic variance. (search for similar items in EconPapers)
JEL-codes: G12 G32 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2013
New Economics Papers: this item is included in nep-cis, nep-rmg and nep-tra
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Published in WP BRP Series: Financial Economics / FE, February 2013, pages 1-15

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