Factors Affecting Risk Premium Of Emerging Market

1864 WordsMar 28, 20168 Pages
Factors in Risk Premium of Emerging Market Can’t Be Ignored: Evidence from China’s Stock Market Most companies set hurdle rates by determined their own weighted average cost of capital (WACC) plus premiums for additional risk factors. During the past eight years, the WACC of most U.S. companies has been in the range of 7% to 9%, which is about 3% to 5% lower than it is in those emerging markets such as China and India. Research led by Gregory V. Milano and Jeffrey L. Routh suggested that companies should use lower hurdle rates while investing in growing nations. According to their research, hurdle rates are simply set too high by some companies because they “exaggerate the risks” and “underestimate the growth potential of emerging markets”. In my opinion, some certain kinds of risks can’t be ignored while investing in the foreign market, especially in the emerging market. The following are four pieces of evidence from China’s stock market: A Young Stock Market Compared to global standards, the development of China’s financial market still remains an early stage. It has existed for only 25 years since Deng conducted the reform and opening-up policy in China. As a result, the market is not yet mature and full of rumors and speculators. Mom-and-pop investors who have only limited understanding of what the market is and, more importantly, how it works are everywhere in the stock market. These individual investors drive more than 80 percent of trading on bourses in Shanghai and

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