Swiss Economics advises Commission for Aviation Regulation on the efficient level of capital costs for Dublin Airport

Our report reflects that financial markets are currently undergoing exceptional times. Real government bond yields have fallen to a historically low level in the past couple of years, suggesting that the real expected return from risk-free assets is currently negative. Traditional approaches to estimating the cost of capital may fail to adequately capture the peculiarities of this new market environment. Hence, we assessed whether the ECB’s recent halt of quantitative easing is likely to have a significant effect on the market and analysed whether financial markets expect bond yields to rise again in the near future. Also, we considered evidence that expectations on equity returns may be more stable over time than underlying risk premia, indicating a so-called Total Market Return approach may be preferred over the traditional Equity Risk Premium approach to estimate the cost of equity.

The full report can be downloaded from the Commission for Aviation Regulation’s website.