FEAS RESEARCH E-BULLETIN FEAS E-BULLETIN DECEMBER 2016 | Page 14

Author: Uzunkaya, Mehmet
Title: An Empirical Model of the International Cost of Equity
Supervisor: Assoc. Prof. Dr. Halit Engin Küçükkaya
Department: Business Administration
Date: January 2016
Abstract: The aim of the study is to propose an empirical model of the international cost of
equity by investigating and analyzing the long-run relation between disaggregated country
risk ratings and country stock market index returns for a large panel of countries. The study tests the
hypothesis that, given the available theoretical and empirical evidence, country risk ratings and
country stock market index returns should move together in the long-run and there should be a
long-run equilibrium between them;thus country risk ratings, with their forward-looking nature about
the political, macroeconomic and financial fundamentals of a large number of countries, may behave
as long-run state variables for stock returns to the extent they are undiversifiable internationally.
The results of the analysis provide evidence in favor of the argument that disaggregated country risk
ratings, in particular the political and economic risk ratings, are related to stock market returns in the
long-run. Using this relation, an empirical model of the international cost of equity is proposed.
The model takes country risk ratings as inputs and finds the international cost of equity for a
specific country of known risk ratings.

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