where the discount rate is estimated using Merton's CAPMI.
The valuation of simple European and American Commodity options with information costs Following Black (1976), we assume that all the parameters of the Merton's (1987) CAPMI are constant through time.
Therefore, using the CAPMI can lead to a better estimation of the cost of capital than the standard CAPM since the CAPMI accounts for shadow costs of incomplete information.
The CAPMI can be used in the reexamination of corporate risks under incomplete information and in particular in the computation of the cost of capital as in Bellalah (2001).
In the absence of taxes, transaction costs and other markets imperfections within countries, the CAPMI can be used.
For example, the French market is not segmented from the world and it seems more appropriate to calculate the cost of capital of the French companies by a global CAPMI.
where the subscript iHG refers to the required return obtained for security i when markets are global and the local CAPMI is used.
The domestic CAPMI and the global CAPMI give the same results only if