Ricerc@Sapienza

In this study a comparison was made between the Capital Asset Pricing Model, the most widely used methodology, and an actuarial method with the use of Credit default swaps and the method based on the inverse of the multiple P/E. These three models are used to estimate the cost of equity. The comparison was made on a sample of 24 banks selected among the largest for assets in the world (Too big to fail banks) belonging to eleven different countries.

In this study, a comparison was made between the Capital Asset Pricing Model (CAPM), the most widely used methodology, and an actuarial method with the use of credit default swaps (CDSs) and the method based on the inverse of the multiple P/E. These three models are used to estimate the cost of equity. The comparison was made on a sample of 24 banks selected among the largest for assets in the world (too big to fail banks) belonging to 11 different countries.

The cost of equity is typically defined as the expected return that investors require to purchase common stock in a firm. It is therefore an important input for bank management when raising capital and making investment decisions and for investors when they value equity securities and construct their portfolios. The Capital Assets Pricing Model (CAPM) method remains the one most commonly used by practitioners and financial advisers to estimate a firm’s cost of equity, as shown in surveys by Brunner et al (1998) and Graham and Harvey (2001).