Revisiting the estimation of the cost of equity of euro area banks

Luis Fernández Lafuerza and Mariya Melnychuk

Financial Stability Review, 2024, issue Spring

Abstract: The aim of this article is to estimate the cost of equity for a large sample of euro area banks. To this end, the authors consider several estimation methodologies falling under two main approaches: (i) multi-factor time-series models of stock market returns; and (ii) dividend discount models. It is found that, at country level, the estimates of the various models display a similar time variation, but differences in levels can be substantial. The relationship between the different cost of equity estimates and bank observables is relatively weak. Estimates from dividend discount models show a somewhat more robust relationship with bank fundamentals, while those from factor models do so more clearly only for larger banks. A combined measure built as a simple average across models also shows a moderate association with fundamentals. Overall, the results highlight the uncertainties inherent in cost of equity estimation and the importance of considering different alternative models.

Date: 2024
Note: 46
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbe/GAP/Secciones/Publicaci ... FSR46_Spring2024.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:revisl:y:2024:i:5:n:2

Access Statistics for this article

More articles in Financial Stability Review from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by ().