№ 8/2019

Fìnansi Ukr. 2019 (8): 61–74https://doi.org/10.33763/finukr2019.08.061

MARKET OF FINANCIAL SERVICES

KERIMOV Pavlo ¹

¹SI “Institute for Economics and Forecasting Ukrainian National Academy of Science”
OrcID ID : https://orcid.org/0000-0002-7793-7788

Features of risk-free rate estimation in Ukraine

The article explores suitability of the most common risk-free rate estimation methods, which are used in the CAPM and its modifications, for Ukrainian conditions. The author details the scope of application, calculation features, possible sources of primary data and the expected range of results for each reviewed method. The most common methods of risk-free rate estimation used in Ukraine include using modified or unmodified refinancing rate of the NBU, deposit rates of big banks that operate in the Ukrainian market, the yield of Ukrainian government bonds (in primary or secondary market), three variants of A. Damodaran’s CDS spread method (based on CDS, bond spread or CDS spread based on sovereign credit rating), a build-up approach and a modifying global (generally, USA) risk-free rate to inflation or an exchange rate differential. Goals and the currency of estimation, as well as the planning horizon, are defined as the main criteria for choosing the risk-free rate estimation method due to a large number of methods available and a wide range of possible outcomes for most of them. The inadequacy of the primary data, especially for frontier markets, and the high dependence of estimation results on the qualifications of the expert are defined as the main challenges of estimating a risk-free rate. Depending on the chosen method of estimation, the current risk-free rate in Ukraine can be assessed from 8.8% to 18.53% in UAH and from 1.09% to 12.69% in USD. Estimations based solely on inflation or exchange rate differentials appear to yield results that strongly deviate from average values and therefore can be considered less precise.

Keywords:CAPM, risk-free rate, discount rate, country risk premium, frontier markets

JEL: C18, C81, G12

KERIMOV P. . Features of risk-free rate estimation in Ukraine / P. . KERIMOV // Фінанси України. - 2019. - № 8. - C. 61-74.

Article original in Ukrainian (pp. 61 - 74)

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