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Damodaran's paper "Equity Risk Premiums..." (2016) discusses the standard of using various measures of sovereign default risk (e.g. Moody's ratings, bond default spreads, CDS spreads) to estimate equity risk premiums for a country.

The implication appears to be that when a country undergoes default or debt restructure, the value of equities will suffer by an equal or greater amount than the holders of sovereign debt (Damodaran uses a 1.23 multiplier for EM). What is happening at the firm level that underpins this relationship? Sure, businesses which hold the debt will suffer (e.g. banks), but this is not the case for most businesses. Why can't the default spread for sovereign debt in an EM country be higher than the risk premium for equities in that country?

For instance, Damodaran currently estimates Greek equity risk premium as 19.90% as follows:

Greek_RP = US_equity_risk_premium + 1.23*Greek_bond_default_spread

Greek_RP = 5.69 + 1.23*11.55

Greek_RP = 19.90

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