In the middle eastern economies, computing the market risk premium is a difficult endeavor, given the high volatility of the financial environment. The premiums may differ according to the time period considered. Damodaram (2000) suggests that the market premium of an emerging economy may be considered the premium in a developed market with a country risk premium added to it. Normally there is a high correlation between market risk and sovereign risk. Following this line of thought, the country risk premium is computed as the spread between a US Credit Default Swap (CDS) and a similar sovereign CDS. The CDS data was collected from Thomson Financial DataStream for the US, Egypt, Israel, Morocco and Turkey. The mid rate spreads between the entity and the relevant benchmark curves were collected for 1 -10 year senior Credit Default Swaps. The rates were expressed in basis points.
Usually this parameter is computed as the spread between a global bond and a similar sovereign bond, however this data was not available. Moreover, choosing a specific sovereign bond is a difficult endeavor, since issues vary a lot in terms of technical features. The CDS data is easier to compare since they are all senior CDS and were matched on maturity.
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