THE DOWNSIDE RISK APPROACH TO COST OF EQUITY DETERMINATION FOR SLOVENIAN, CROATIAN AND SERBIAN CAPITAL MARKETS

In developed countries Capital Asset Pricing Model (CAPM) is the most frequently used model for determination of the cost of equity. On the other hand, there is no consensus about which model would be the most appropriate and easy to use for the estimation of cost of equity in emerging markets. The aim of this research is to analyze on the basis of Estrada's work (2000; 2007) four different risk measures based on standard deviation, beta, downside risk and downside beta, as well as corresponding asset pricing models for capital markets of Slovenia, Croatia and Serbia in order to determine the most appropriate asset pricing model and to estimate the costs of equity for selected markets. It should be pointed out that asset pricing research in general is scarce for selected markets and that similar research was not done for them. Results of the research show that for total selected market the most appropriate risk measure out of four proposed is downside risk, while the model that best explains full sample mean returns contains combination of downside risk and downside beta. Results of the research favor downside risk measure for each selected market. When considering multiple regressions with the highest explanatory power for each selected market, results show that all multiple regressions contain downside risk as a risk variable and beta or downside beta as additional systematic risk variable, indicating one more time importance of downside risk for Slovenian, Croatian and Serbian capital markets. The results show that the average cost of equity estimated on the basis of asset pricing model with downside risk as a risk measure amounts to 20.16% for full sample. The results also indicate that Serbia has the highest cost of equity and that the cost of equity for Slovenian and Croatian capital markets is lower and rather similar.