Market Risk Premium Used In 71 Countries In 2016: A Survey With 6,932 Answers
University of Navarra – IESE Business School
Alberto Ortiz Pizarro
University of Navarra, IESE Business School
Isabel Fernandez AcIn
University of Navarra
May 6, 2016
This paper contains the statistics of the Equity Premium or Market Risk Premium (MRP) used in 2016 for 71 countries. We got answers for more countries, but we only report the results for 71 countries with more than 8 answers. 54% of the MRP used in 2016 decreased (vs. 2015) and 38% increased.
Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references used to justify the MRP, and comments from 46 persons.
Market Risk Premium Used In 71 Countries In 2016: A Survey With 6,932 Answers – Introduction
Market Risk Premium (MRP) used in 2016 in 71 countries
We sent a short email (see exhibit 1) on April 2016 to more than 23,000 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 Market Risk Premium (MRP) used “to calculate the required return to equity in different countries”. We also asked about “Books or articles that I use to support this number”.
By May 4, 2016, we had received 2,732 emails with 6,734 specific MRP used in 2016.1 We considered 86 of them as outliers because they provided a very small MRP (for example, -4% for the USA) or a very high MRP (for example, 30% for the USA). Other 112 persons answered that they do not use MRP for different reasons (see table 1). We would like to sincerely thank everyone who took the time to answer us.
Some answers that do not provide a figure: “We use a minimum IRR”; “We use multiples”; “MRP is a concept that we do not use”; “It is confidential”; “The CAPM is not very useful”; “I think about premia for particular stocks”; “I teach derivatives: I did not have to use a MRP”; “The MRP changes every day”.
Table 2 contains the statistics of the MRP used in 2016 for 71 countries. We got answers for more countries, but we only report the results for 71 countries with more than 8 answers. Fernandez et al (2011) is an analysis of the answers for the USA; it also 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). Fernandez et al (2011b)3 is an analysis of the answers for Spain.
Figures 1 and 2 are graphic representations of the MRPs reported in table 2.
Differences among respondents
Table 3 and figure 3 show the differences in Market Risk Premium used by the same person for 2 countries. 312 respondents provided us with answers for USA and Germany. 155 provided us with answers for USA and UK.
References used to justify the MRP figure
Some respondents indicated which books, papers… they use as a reference to justify the MRP that they use. The most cited references were: Damodaran, Internal estimate, Duff&Phelps, Ibbotson/Morningstar, Fernandez, DMS, Graham-Harvey, Bloomberg, Analysts, Experience, Own judgement, Grabowski , Pratt’s & Grabowski, Brealy & Myers, Siegel.
Comparison with previous surveys
Table 4 compares some results of this survey with the results of 2011, 2012, 2013, 2014 and 2015.
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.4 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”.
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