DEVELOPING THE EQUITY RISK PREMIUM UNDER FRONTIER MARKETS: THE CASE OF UKRAINE

Abstract

The paper is devoted to problems of the equity risk premium estimation under high volatility of frontier markets. Low capitalization and liquidity of frontier markets should be counted into discount rate as additional premium for the risk of frontier markets not included in system risk of country. High investment risk along with exceed return provide foreign investors with potential upside. Adjusting cost of investing by the value of additional market risk common to frontier markets assures adequate value of the investment. As a result, estimation of adjusted equity risk premium for frontier markets allows defining fundamental equity value. Adequate valuation process play key role in current financialized world economy based on newest management concepts. Sustainable and long-term growth of economy nowadays is contributed by value maximization of each market participant. Hence, today the fundamental value development (for management; stakeholder; investor) become strategic goal for market players. Developing the fundamental value under terms of frontier markets complexify by system risks, which should be counted into the equity risk premium.