What is the Historical Risk Premium for the Russian Market? : A study on the Russian Trading System

Abstract: Due to noisy historical data, the market risk premium in Russia and many emerging markets has been difficult to explain and is often of a more arbitrary nature, compared to risk premiums found in developed markets. Using the capital asset pricing model, we found the historical market risk premium on the RTS Exchange to be 20% with a standard error of about 15%. However, we suspect that a risk premium of 20% is too low and that an extra premium of about 5-10% needs to be added to capture the country risk already included in the benchmark yield.   We also divided the period into sub-periods to bring forth driving factors of the market risk premium. We found risk premiums ranging from -210% to +138%, indicating that large abnormalities exists that are affected by certain events. In the earlier stages of our period, Country- and Political risk appears to have a great influence. As the market matured and the political instability decreased, oil prices and currency exchange rates had a greater impact on the market and the MRP.