Issued since 1995
Welcome to the Finance of Ukraine site (demo).
Login | Register
ACADEMY
OF FINANCIAL
MANAGEMENT
.


№ 8/2019

№ 8/2019

Fìnansi Ukr. 2019 (8): 61–74
https://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) DownloadDownloads :1246
1. French, J. (2018). A Practitioner's Guide to the capital asset pricing model (CAPM): an empirical study. Research in Finance, 34, 1-18.

2. Pereiro, L. E. (2002). Valuation of companies in emerging markets: a practical approach. New York: Wiley.

3. Roggi, O., Gianozzi, A., & Baglioni, T. (2017). Valuing emerging markets companies: New approaches to determine the effective exposure to country risk. Research in International Business and Finance, 39, 553-567.
doi.org/10.1016/j.ribaf.2016.07.028

4. Semenyuk, V. (2016). Pragmatics of using a modified CAPM model for estimating cost of equity on emerging markets. Baltic Journal of Economic Studies, 2, 135-142.
doi.org/10.30525/2256-0742/2016-2-2-135-142

5. Damodaran, A. (2006). Applied corporate finance: a user's manual (2nd ed.). Hoboken, NJ: John Wiley & Sons.

6. Kushnir, S. O. (2017). Using models CAPM in determining return of shares national enterprises. Scientific Bulletin of Uzhhorod University. Series: international economic relations and the world economy, Vol. 12, Iss. 1, 179-182 [in Ukrainian].

7. Tereshchenko, O. O. (2010). The rate of discounting in adopting financial and investment decisions. Finance of Ukraine, 9, 77-90 [in Ukrainian].

8. Credit Agricole. (2019, May 30). Fitch ratings has affirmed Credit Agricole Bank's status as one of the highest rated local issuers. Retrieved from credit-agricole.ua/o-banke/pres-centr/novini/mizhnarodne-rejtingove-agentstvo-fitch-pidtverdilo-status-kr-800 [in Ukrainian].

9. Ministry of Finance of Ukraine. (2019). Government securities credit ratings 2019. Retrieved from www.minfin.gov.ua/news/view/kredytni-reitynhy-derzhavnykh-tsinnykh-paperiv--?category=borg&subcategory=kredytnyi-reitynh [in Ukrainian].

10. Damodaran, A. (2003). Country Risk and Company Exposure: Theory and Practice. Journal of Applied Finance, Vol. 13, No. 2, 63-76.

11. Damodaran, A. (n. d.). Country Risk Premium Spreadsheet. Retrieved from pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html.

12. Damodaran, A. (n. d.). Discount rates. The D in the DCF. Retrieved from people.stern.nyu.edu/adamodar/pdfiles/eqnotes/dcfrates.pdf.

13. Assessment of risk free rate of return: sir did not lose. (2015, July 16). Estimatica. Retrieved from www.estimatica.info/assessment/standards-and-methods/103-otsenka-bezriskovoj-stavki-dohodnosti-pan-ne-propal [in Russian].

14. US inflation forecast 2019-2024 and up to 2060, data and charts. (n. d.). Knoema. Retrieved from knoema.ru/kyaewad/us-inflation-forecast-2019-2024-and-up-to-2060-data-and-charts.

15. National Bank of Ukraine. (2019, May 3). The National Bank maintained its inflation forecast for 2019-2021. Retrieved from bank.gov.ua/control/uk/publish/article?art_id=93772762&cat_id=55838 [in Ukrainian].

16. 10-Year Treasury Inflation-Indexed Security, Constant Maturity. (n. d.). FRED economic data. Retrieved from fred.stlouisfed.org/series/DFII10#0.

17. Grui, A., Lepushynsky, V., & Nikolaychuk, S. (2018). A neutral real interest rate in the cause of a small open economy: application to Ukraine. Visnyk of the National Bank of Ukraine, 243, 4-20.
doi.org/10.26531/vnbu2018.243.004