MODELING THE EFFECTS OF SUSTAINABLE DEVELOPMENT ON THE EQUITY RISK PREMIUM

GHITA, George Aurelian; BALICA, Daniel Andrei; SOARE, Nicolae

doi:10.65672/jfme.2025.1.4

MODELING THE EFFECTS OF SUSTAINABLE DEVELOPMENT ON THE EQUITY RISK PREMIUM

Authors

GHITA, George Aurelian — School of Advanced Studies of the Romanian Academy, Doctoral School of Economic Sciences, National Institute for Economic Research "Costin C. Kirițescu", Institute of National Economy, Romanian Academy, Romania
BALICA, Daniel Andrei — School of Advanced Studies of the Romanian Academy, Doctoral School of Economic Sciences, National Institute for Economic Research "Costin C. Kirițescu", Institute of National Economy, Romanian Academy, Romania
SOARE, Nicolae — School of Advanced Studies of the Romanian Academy, Doctoral School of Economic Sciences, National Institute for Economic Research "Costin C. Kirițescu", Institute of National Economy, Romanian Academy, Romania

Landing page: https://www.icfm.ro/jfme.icfm.ro/articles/vol13i1p53-64.html

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DOI: 10.65672/jfme.2025.1.4

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Abstract

This paper is a secondary data analysis regarding the relationship between sustainable development and the cost of equity (Equity Risk Premium — ERP) in the European context, with the main objective of providing a panel econometric model with country and time-specific effects for ERP estimation. The study adopts a quantitative methodology, combining panel regression and secondary data analysis of a sample from 28 European countries over the period 2000–2023. The findings reveal a generally negative correlation between the Sustainable Development Index (SDG Index) and ERP. Moreover, it was observed that most individual SDG indicators did not show statistical or economic significance; out of the 17 components of the aggregate SDG Index, only 6 proved to be significant. The study emphasizes that the panel econometric model employed can estimate ERP values with high accuracy, average estimation errors being small. Thus, the choice of long-term bond yields and the aggregate Sustainable Development Index (SDG Index) as independent variables generated significant results, indicating that these variables can be used in models for estimating the cost of equity.

JEL Classification

C23, G32

Keywords

econometric panel model, cost of capital, equity risk premium, sustainable development

How to cite

GHITA, George Aurelian; BALICA, Daniel Andrei; SOARE, Nicolae (2025). MODELING THE EFFECTS OF SUSTAINABLE DEVELOPMENT ON THE EQUITY RISK PREMIUM. Journal of Financial Management and Economics, 13(1), 53-64. DOI: 10.65672/jfme.2025.1.4.

RePEc record

Handle: Repec:vls:rojfme:v:13:y:2025:i:1:p:53-64