Discount Rate (Risk-Free Rate And Market Risk Premium) Used For 41 Countries In 2015: A Survey by SSRN

Pablo Fernandez

University of Navarra – IESE Business School

Alberto Ortiz Pizarro

University of Navarra, IESE Business School

Isabel Fernández Acín

University of Navarra

April 23, 2015

Abstract:

This paper contains the statistics of a survey about the Risk-Free Rate (RF) and of the Market Risk Premium (MRP) used in 2015 for 41 countries. We got answers for 68 countries, but we only report the results for 41 countries with more than 25 answers.

The average (RF) used in 2015 was smaller than the one used in 2013 in 26 countries (in 11 of them the difference was more than 1%). In 8 countries the average (RF) used in 2015 was more than a 1% higher than the one used in 2013.

The change between 2013 and 2015 of the average Market risk premium used was higher than 1% for 13 countries. Most of the respondents use for US, Europe and UK a Risk-Free Rate (RF) higher than the yield of the 10-year Government bonds.

1. Market Risk Premium (MRP), Risk Free Rate (RF) and Km [RF + MRP)] used in 2015 in 41 countries

We sent a short email (see exhibit 1) on the period March 15- April 10, 2015 to about 22,500 email addresses of finance and economic professors, analysts and managers of companies obtained from previous correspondence, papers and webs of companies and universities. We asked about the Risk Free Rate and the Market Risk Premium (MRP) used “to calculate the required return to equity in different countries”.

By April 22, 2015, we had received 2,396 emails. 216 persons answered that they do not use MRP for different reasons (see table 1). The remaining 2,758 emails had specific Risk Free Rates and MRPs used in 2015 for one or more countries.1 We would like to sincerely thank everyone who took the time to answer us.

Market Risk Premium

Table 2 contains the statistics of the MRP used in 2015 for 41 countries. We got answers for 68 countries, but we only report the results for 41 countries with more than 25 answers. Table 3 contains the statistics of the Risk-Free Rate (RF) used in 2015 in the 41 countries and Table 4 contains the statistics of Km (required return to equity: Km = Risk-Free Rate + MRP).

Figures 1, 2 and 3 are graphic representations of the MRPs reported in table 2.

Market Risk Premium

MRP

MRP

MRP

MRP

MRP

 

2. Changes from 2013 to 2015

In this section, we compare the results of 2015 with the results of a similar survey collected in 2013 (see http://ssrn.com/abstract=914160).

MRP

MRP

MRP

3. RF used in 2013 and 2015 for US, Europe and UK vs. yield of the 10-year Government bonds

Market Risk Premium

4. Previous surveys

Previous surveys. Market risk premium used

2008 http://ssrn.com/abstract=1344209

2010 http://ssrn.com/abstract=1606563; http://ssrn.com/abstract=1609563

2011 http://ssrn.com/abstract=1822182; http://ssrn.com/abstract=1805852

2012 http://ssrn.com/abstract=2084213

2013 http://ssrn.com/abstract=914160

2014 http://ssrn.com/abstract=1609563

Welch (2000) performed two surveys with finance professors in 1997 and 1998, asking them what they thought the Expected MRP would be over the next 30 years. He obtained 226 replies, ranging from 1% to 15%, with an average arithmetic EEP of 7% above T-Bonds.2 Welch (2001) presented the results of a survey of 510 finance and economics professors performed in August 2001 and the consensus for the 30-year arithmetic EEP was 5.5%, much lower than just 3 years earlier. In an update published in 2008 Welch reports that the MRP “used in class” in December 2007 by about 400 finance professors was on average 5.89%, and 90% of the professors used equity premiums between 4% and 8.5%.

Johnson et al (2007) report the results of a survey of 116 finance professors in North America done in March 2007: 90% of the professors believed the Expected MRP during the next 30 years to range from 3% to 7%.

Graham and Harvey (2007) indicate that U.S. CFOs reduced their average EEP from 4.65% in September 2000 to 2.93% by September 2006 (st. dev. of the 465 responses = 2.47%). In the 2008 survey, they report an average EEP of 3.80%, ranging from 3.1% to 11.5% at the tenth percentile at each end of the spectrum. They show that average EEP changes through time. Goldman Sachs (O’Neill, Wilson and Masih 2002) conducted a survey of its global clients in July 2002 and the average long-run EEP was 3.9%, with most responses between 3.5% and 4.5%.

Ilmanen (2003) argues that surveys tend to be optimistic: “survey-based expected returns may tell us more about hoped-for returns than about required returns”. Damodaran (2008) points out that “the risk premiums in academic surveys indicate how far removed most academics are from the real world of valuation and corporate finance and how much of their own thinking is framed by the historical risk premiums… The risk premiums that are presented in classroom settings are not only much higher than the risk premiums in practice but also contradict other academic research”.

Table 4 of Fernandez et al (2011a) shows the evolution of the Market Risk Premium used for the USA in 2011, 2010, 2009 and 2008 according to previous surveys (Fernandez et al, 2009, 2010a and 2010b).

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