Expected Equity Risk Premium: Survey Approach in the Case of a Small Emerging Market

Abstract

Estimating the equity risk premium is difficult in the case of developed economies with mature stock markets, and it is even harder in the case of emerging markets with short and volatile history of the stocks exchange. In this paper it will be shown the attempt to estimate the expected ERP as a key parameter for financial theorist and practitioners using the survey approach in the case of the Republic of Macedonia as a small and open emerging market economy. It will be shown that the risk-return trade-off holds. Namely, the estimated ERP for the Republic of Macedonia for 2013 amounts 10.84% and 10.92% on average for the next 10 years. It is higher and similar as in the case of the other emerging and developing markets which are perceived by the investors as a riskier markets comparing to the developed markets where the expected ERP is lower.

Keywords: emerging markets, market returns, risk-free rate, expected equity risk premium