Ex-ante equity risk premia: Expectational estimates using stock market returns forecasts in the emerging equity market

Abstract

We estimated the ex-ante equity risk premium for the Republic of Macedonia, which is a young, small and open emerging market. We polled academics and practitioners for their expectations on the stock market index MBI10 as a proxy for market portfolio. The risk premium is the expected MBI10 return relative to a government bond yield. Using the Kolmogorov-Smirnov and Anderson-Darling goodness-of-fit tests we determined the best fitted statistical distribution, and consequently estimated the short-term ERP of 8.55 and long-term average ERP for the next 10 years of 7.76. The estimated ex-ante ERP is higher and similar as it is in the other emerging markets.