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Country Risk Premiums
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To estimate the equity risk premium for a country, I start with a mature market premium and add an additional country risk premium, based upon the risk of the country in question.
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Use the look up table in the next worksheet, to look up the statistics for an individual country or region.
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Step 1: Estimating mature market risk premium
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To estimate the mature market risk premium, I start with the implied equity risk premium for the S&P 500. To see the latest estimate for this number, go to my website and you can download the excel spreadsheet containing the implied premium
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Link to site:
http://www.damodaran.com
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Historical monthly ERP:
https://pages.stern.nyu.edu/~adamodar/pc/implprem/ERPbymonth.xls
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Until the January 2025 update, I used the S&P's equity risk premium as the mature market premium, drawing on the Moody's Aaa rating for the United States.
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On May 16, 2025, Moody's downgraded the US from Aaa to Aa1. To get the mature market premium, I now subtract the US's country risk premium (based on its rating and the relative equity market volatility) from the S&P's eRP
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Mature market premium = ERP for the S&P 500 minus (Default spread for US sovereign rating × Relative Equity Volatility)
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In January 2026, for example, when the implied ERP for the S&P 500 was 4.59% (over the adjusted dollar riskfree rate), the US had a rating of Aa1 and the default spread for that rating was 0.23% and the relative equity market volatility was 1.52
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Mature market premium = 4.61% - (0.23% × 1.52) = 4.23%
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Step 2: Estimate the default spread for the country in question. I offer two choices, one based upon the local currency sovereign rating for the country from Moody's and the other is the CDS spread for the country (if one exists)
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Moody's ratings:
http://www.moodys.com
(You will have to register, but it is free. Look under sovereign ratings)
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Ratings to spreads:
Based upon my estimates of typical spreads for each ratings class. I compute these by averaging CDS spreads and sovereign US$ bond spreads by ratings class, at the start of every year.
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CDS spreads:
Bloomberg
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If you cannot find a country on this list, it is because that country does not have a sovereign rating or a sovereign CDS spread. Try the PRS worksheet in this spreadsheet for an alternate estimate.
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Step 3: Convert the default spread into a country risk premium
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With sovereign ratings default spreads, you have two choices:
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Choice 1: Use the default spread as the measure of the additional country risk premium. To make this choice, go into the ERP worksheet and set cell E5 to 1.00.
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Choice 2: Scale the default spread up to reflect the higher risk of equity in the market, relative to the default spread. I used the ratio of the S&P Emerging Market Equity Index std deviation to the iShares Emerging Market Bond Index standard deviation
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With CDS spreads, I compute the base number in two steps
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Substep 1: Since the base equity premium is for a mature market (assumed to be default free), I net out the CDS spread for Switzerland (the lowest sovereign CDS) from each country's CDS to get a net spread.
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Substep 2: I apply the scaling factor that you chose for the default spreads to this number to get a country risk premium. The default scaling is set at the my most recent year's estimate, but you can change it to 1, if you would
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prefer not to scale the default spread.
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Step 4: Compute a total equity risk premium
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Add the mature market premium from step 1 to the country risk premium from step 3 to get a total equity risk premium.
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Step 5: Compute regional averages and regional weighted averages
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For the regional averages, I use a simple average of the total and country risk premiums by region
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For the weighted averages, I use the World Bank GDP estimates from the most recent year.
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https://data.worldbank.org/indicator/NY.GDP.MKTP.CD
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If you are interested in a fuller explanation of these concepts, try these references:
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My paper on equity risk premiums:
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My paper on country risk premiums:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4398884
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Watch my lectures on country risk premiums:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4509578
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https://www.youtube.com/watch?v=aIRPvY2SQ94
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https://www.youtube.com/watch?v=D3IGn6tH03c
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