Methodology of calculating risk premiums in the environment of the Czech Republic and its comparison with Damodaran

¹ University of Zilina, The Faculty of Operation and Economics of Transport and Communications, Department of Economics, Univerzitna 8215/1, 01026 Zilina, Slovakia
² Institute of Technology and Business, School of Expertness and Valuation, Okruzni 517/10, 37001 Ceske Budejovice, Czech Republic

^* Corresponding author: kuceraj@mail.vstecb.cz

Abstract

Investors' decisions are largely influenced by the riskiness of the country. Several different approaches are available to calculate this risk, but even so, the values set by Damodaran are usually used, even for non-US states. The aim of the paper is to propose a methodology for creating a risk premium in the environment of the Czech Republic and then compare it with Damodaran [1]. Methods applicable in the Czech Republic and Damodaran methods are used, then these methods are compared. For Czech as well as foreign investors, the easiest way to obtain a risk premium is to use the company’s investment rating. In the case of determining the risk premium of the Czech Republic, the easiest method is the CRP (country risk premiums) model. If the country’s market does not have a long history or does not have such a developed capital market, it is recommended to apply data from the US capital market. However, there are significant differences in the economy between Europe and the USA, so the data of an European country such as Germany, which has historical risk premium calculations, should be used.