The effects of volatility and changes in conditional correlations in the stock markets of Russia and developed countries

Salmanov, N Oleg; Babina, V Natalia; Samoshkina, V Marina; Drachena, P Irina; Salmanova, P Irina

doi:10.2298/eka2027067s

EKON ANAL

2020

DOI: 10.2298/eka2027067s

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The effects of volatility and changes in conditional correlations in the stock markets of Russia and developed countries

N Oleg Salmanov

V Natalia Babina

V Marina Samoshkina

et al.

Abstract: The aim of this article is to identify patterns of profitability volatility and to establish the degree of dynamic conditional correlation between the stock markets of developed countries and those of Russia. This issue is important for investment strategies and the international diversification of investments. We use the BEKK-GARCH, CCC-GARCH, and DCCGARCH models and show that the correlation between the Russian stock market and the markets of the USA, UK, Germany, and France has decreased s… Show more

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Cited by 2 publications

References 16 publications

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The cost of equity of companies subject to sovereign risk

Salmanov

2022

FASE

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Subject. The article considers the issue of establishing the cost of equity capital of companies, taking into account sovereign risk. Objectives. The study aims at choosing a method to estimate the cost of equity subject to country risk and a method to determine the level of sovereign risk for domestic companies. Methods. The analysis rests on two methods for determining the cost of equity given the sovereign risk, i.e. the Damodaran’s model and the hybrid CAPM model. The approaches under consideration differ in the choice of a developed market country, specifically, the United States (according to the S&P 500 Index) and Germany (according to the DAX Index), and in the choice of a method for calculating the share of country risk attributable to the company. Results. Using the Damodaran’s model and the hybrid CAPM model, I established the cost of equity, determined the degree of country risk that falls on company, for 10 domestic companies. To estimate the cost of equity for 10 companies, I used the Damodaran’s model for companies and the hybrid CAPM model (which I adjusted). Conclusions. The larger the scale of the company, the greater the degree of sovereign risk falls on it. Accordingly, the cost of equity increases, and company value decreases. The gamma index varies depending on the volatility of stock returns. This indicator better expresses company's exposure to country risk. Comparing the results with the choice of the U.S. or German base market shows that in both models, the cost of equity based on the US market will be higher, and, accordingly, the company value will be lower.

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The cost of equity of companies subject to sovereign risk

Salmanov

2022

FASE

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The influence of the degree of the Russian stock market integration on the cost of equity

Salmanov

2021

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Subject. This paper examines how to determine the cost of equity for a developing economy, if the latter is segmented from the leading developed economy of the world. Objectives. The aim is to establish the importance of determining the cost of equity in the Russian economy, depending on the country of the developed market. Methods. All well-known international methods for determining the cost of equity, taking into account the country risk, are involved in the analysis. For calculations, I use yields of the world’s important market indices. Results. The study shows that the value of equity capital (subject to country risk), which is established under all international methods for the reference market of European developed countries, will be lower. Conclusions. CAPM models, used for developed markets, produce too low cost of capital, when they are applied as-is to developing countries. Therefore, for developing countries, models are used, which rest on the idea of adding a country risk premium to the risk premium, for the reference market of a developed country. This theory does not regulate the choice of a reference market from among developed countries. However, some studies found that the US market is not the most influential for the Russian market. The paper states that the choice of European developed countries provides a 16.8% reduction in the cost of equity, which, in turn, provides an increase in company value by a third.

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The effects of volatility and changes in conditional correlations in the stock markets of Russia and developed countries

Cited by 2 publications

References 16 publications

The cost of equity of companies subject to sovereign risk

The cost of equity of companies subject to sovereign risk

The influence of the degree of the Russian stock market integration on the cost of equity

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