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The Cost of Capital in Emerging Markets

Geert Bekaert
Stanford University, Stanford, California, USA 94305
National Bureau of Economic Research, Cambridge, Massachusetts, USA 02138

Campbell R. Harvey
Duke University, Durham, North Carolina, USA 27708
National Bureau of Economic Research, Cambridge, Massachusetts, USA 02138

Abstract

We analyze the the cost of capital in emerging markets. We survey the current practices and detail their limitations. In segmented capital markets, the cost of capital is determined by local factors. In integrated capital markets, the cost of capital is determined by sensitivities to global economic factors. We propose a methodology based on the fact that many emergin+g markets have become more integrated into world capital markets. This provides a forward looking expected return for an investment in an individual stock in an emerging market.