Session 4: Risk free Rates (continued) and first steps on ERP

We started the class by completing the discussion of risk free rates, exploring why risk free rates vary across currencies and what to do about really low or negative risk free rates. The blog post below captures my thoughts on negative risk free rates:
We are about halfway through the discussion of equity risk premiums but the contours of the discussion should be clear.
a. Historical equity risk premiums are not only backward looking but are noisy (have high standard errors). You can the historical return data for the US on my website by going to
Click on current data, and look to the top of the table of downloadable data items.
b. Country risk premium: The last few months should be a reminder of why country risk is not diversifiable. As you see markets are volatile around the world, I think you have a rationale for a country risk premium. You can get default spreads for country bonds on my site under updated data. If you are interested in assessing and measuring country risk, to get from default spreads to equity risk premiums, you need two more numbers. The first is the standard deviation for the equity market in the country that you are trying to estimate the premium for. Try the Bloomberg terminal. Find the equity index for the country in question (Bovespa for Brazil, Merval for Argentina etc.) and type in HVT. This should give you the annualized standard deviation in the index - change the default to weekly and use the 100-week standard deviation. Do the same for the country bond in question. The two standard deviations should yield the relative volatility. If you have trouble finding either number, just multiply the default spread by 1.4 to get a rough measure of the country risk premium. If you want my estimates of country risk premiums, check under updated data on my website. The direct link is below:
You can also see my latest blog post on country risk here:

[badbull]

I highly appreciate these lessons, they're very informative, inspiring, and well presented in such a way that I can understand the contents. Thank you Sir.

[tejasshah]

@Aswath Damodaran. In a negative risk free rate environment, can we add back the negative risk free rate to discount rate while valuing the cash flow.

[Mimmivs]

What do you do if you have several USD bonds in an emerging market with different interest rates? For example in Russia the interest rate range is 3.4 - 12.75% and their maturity dates are similar.

[sanjaysrik]

Found the the slides on risk-free rates very helpful

[sitaraagarwal]

@aswath sir in slide 44, why did you go to dollars and convert it back to franc when everything was in franc currency ?

[mattegger]

On slide 43 I would argue that inflation has artificially stayed low through QE. How could inflation possibly be low with the Fed printing all this money, not to mention other banks creating money from thin air through the extension of credit?

[Ashutosh]

In the equity volatility based approach, what do i need to observe in an index to come to a conclusion that it is the right one for comparing?
eg. In India we have indices like, NIFTY(51 stocks), SENSEX (30 Stocks), whose standard deviation should I select? Or if i am comparing S&P 500 (USA), then i should take S&P BSE 500 (India)?


Thank you in advance to anyone who tries to help me with this.

[retrieverim]

Why does low inflation rates lead to a low growth in cash flows?

[CommandoX]

The first five minutes of this video probably could have been edited out — I thought the thing was broken...