According to a lot of empirical studies CAPM, still mostly used in analysis in developed markets, gives inappropriate estimates of equity returns in emerging markets due to its drawbacks. Nevertheless in emerging markets there is no standard way of estimating the cost of equity.

There is strong empirical evidence that in emerging markets unsystematic risk is very significant since the markets are inefficient. The existence of efficiency is debatable for the following reasons:

-          Stock markets tends to be relatively small

-          The importance of stock markets in the economy is relatively small

-          Stock markets are highly concentrated

-          Data series are extremely short

-          Market and cost of capital information is scarce, unreliable and volatile.

Among portfolio methods, which can be potentially applied in emerging markets new and the most interesting model is DCAPM. In DCAPM framework the required rate of return depends on downside risk measured by downside beta. As for non-CAPM methods (non-portfolio methods) our attention was mostly attracted by Erb- Harvey- Viskanta model of credit ratings.

The primary aim for us is to carry out empirical study and choose the most appropriate model for the cost of equity estimation in Russian market. Here there are at least two main directions of the analysis. The first is to calculate required rate of return for individual stocks of the companies listed on RTS. The second is to determine the cost of equity for the whole Russian stock market. Our investigation we should begin from testing hypothesis about Russian market segmentation. Then we should test cost of equity valuation models (for example DCAPM, Erb- Harvey- Viskanta model as well as traditional CAPM), compare results and make some kind of robustness checking.

Dealing with country risks it would be interesting to test the models mentioned above for a lot of emerging markets, which are included in CIS.