Risk perception and cost of capital in emerging market projects using dynamic conditional correlation model

Abstract

Purpose Cost estimation is a major concern while planning projects on public–private partnership (PPP) terms in developing countries. To bridge the gap of the right approximation of cost of capital, this study aims to sermon a significant role of investor’s risk perception as unsystematic risk in PPP-based energy projects. Design/methodology/approach To investigate the effective mechanism of determining cost of capital and valuing the capital budgeting, a pure-play method has been acquired to measure systematic risk. In addition, dynamic conditional correlation (DCC) and generalized autoregressive conditional heteroscedasticity (GARCH) models have been applied to calculate weighted average cost of capital. Findings Initially, a joint cost of capital of energy-related projects has been calculated using DCC-GARCH and pure-play method. Investors risk perception has been discussed through market point of view using country risk premium modeling. Latter yearly betas have been calculated using DCC signifying the final outcomes that applying a dynamic model can provide a better cost estimation in emerging economies. Practical implications The findings are implicating that due to the involvement of international investors, domestic risk is linked with country risk. In such situations, market-related information is a key factor to find out the market performance, helping in the estimation of cost of capital through capital asset pricing model (CAPM). High dynamic nature of emerging economies causes an impediment in the estimation of cost of capital. Consequently, to calculate risk in dynamic markets, this study has acquired DCC model that can predict the value of beta factor. Originality/value Study contributes to the body of knowledge by addressing an important issue of investor’s risk perception and effective implication of CAPM using pure-play and DCC-GARCH when data is not promptly available in dynamic situations.

Guest editorial: Islamic finance in South Asia

“…The yearly betas are determined using DCC, the end result being that using a unique model can give a special expense assessment in emerging economies. The study concludes by addressing investors’ risk discernment and the successful ramifications of CAPM using pure play and DCC-GARCH when information is not speedily available in unique circumstances (Afzal et al , 2022).…”

“…Thus, there is a pressing need to research the successful management of Islamic financial institutions and clarify what stakeholders can learn from them. To this end, many studies have been published on assorted topics of Islamic Finance in South Asia, given its extensive Muslim population (Haseeb et al , 2022; Afzal et al , 2022).…”

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