Working Paper: CEPR ID: DP3062
Authors: Kees Koedijk; Clemens J.M. Kool; Peter Schotman; Mathijs A. van Dijk
Abstract: This Paper analyses to what extent international and domestic asset pricing models lead to a different estimates of the cost of capital for an individual firm. We distinguish between (i) the multifactor ICAPM of Solnik (1983) and Sercu (1980) including both the global market portfolio and exchange rate risk premiums, and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 3,293 stocks from nine countries in the period 1980-99. We find that the domestic CAPM yields a different estimate of the cost of capital from the multifactor ICAPM for only three percent of the firms in our sample. The difference amounts to on average 50 basis points for the US, 75 basis points for Germany and Japan and similar differentials for the other countries. We attribute these findings to strong country factors in individual stock returns.
Keywords: cost of capital; exchange rate exposure; ICAPM; pricing error
JEL Codes: F31; G15; G30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| domestic CAPM (G59) | cost of capital estimates (G31) |
| multifactor ICAPM (G19) | cost of capital estimates (G31) |
| country-specific factors (F29) | cost of capital estimates (G31) |
| local market factors (R33) | cost of capital estimates (G31) |
| global market factors (F61) | cost of capital estimates (G31) |
| exchange rate risks (F31) | cost of capital estimates (G31) |