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Working paper

Cost of Equity and Risk: Empirical Evidence from Russia

Dranev Y., Nurdinova Y., Redkin V., Fomkina S.
The choice of appropriate model for estimation of cost of equity in emerging markets is still a very challenging problem. Market inefficiency, limited opportunities for diversification, as well as liquidity issues inspire researches to look for risk characteristics beyond the usual mean variance framework of the classical capital asset pricing model. Various models were developed for the past several decades proposing new ways of risk assessment, however, controversial empirical evidence of these models requires careful consideration. We tested empirically how different risk parameters, including those entropy based, explain the rate of return on Russian equities. We compare different models to choose the best suiting one for each period of economic cycle.