What proxies do you use as an implied risk premium for Europe (say FTSE100, DAX40 or STOXX600)? Damodaran’s calculations come really handy and up-to-date when working with US equities. However, how do you tackle an international valuation? What came to my mind is, take the implied US ERP, add back the 10 year US yield and subtract 10 year European one (here, 4.29%+2.59-.44=6.44% for Germany company).
What do you do in your practice? Do you manually interpolate it, use different source of do a computation similar to the one above?
Doesn’t Damodaran cover this in his online course too?
I know he covers the default risk premium in relation to the risk free rate for different countries, but i haven’t gotten on to the equity risk premium side of his CAPM inputs yet (studying for Level 3 takes priority, so I’m only progressing at a slow pace through Damodaran when I find the time).
What Europe? Western, Eastern, EU, Non EU, EMU? European market is far away to be unique and integrated market.
What about of bond yield + risk premium approach?
I was looking at the UK/Germany. According to Demodaran’s database the risk premium for the US and Wester Europe should be the same. I don’t know why I decided to adjust for interest rate differential as it should be absorbed by the FX markets and not the implied equity risk premium. At the same time, on Demodaran’s website, the implied ERP for the UK is set at 7% (dated almost 1 year) while the US one is mare 4. I was hoping that someone is maintaining a similar database for the EU; apparently it is not the case (at least not public).
Bond yield + risk premium is an option, but implied ERP should be more accurate.
Try to look at Eurostat data base. Search for country risk premium in EU. BTW, they use ICAPM.