Central European Business Review X:X | DOI: 10.18267/j.cebr.413

Equity Risk Premium in Hungary’s Emerging Market: Evaluating Country Risk and Financial Dynamics

Marco I. Bonelli
Ca’ Foscari, Department of Management


This study evaluates Hungary’s equity market using Damodaran’s country risk premium (CRP) framework to estimate its cost of equity and assess investment attractiveness within the Central and Southeast European context. The paper integrates Hungary’s sovereign credit rating, default spread, and a volatility adjustment to compute an implied cost of equity of approximately 11.5%, placing it among the least risky regional markets. The methodology benchmarks Hungary against peers including Romania, Slovakia, Serbia, Bosnia, and North Macedonia using key structural indicators such as market capitalization, turnover, P/E ratios, and foreign ownership. Findings show that Hungary benefits from deeper market liquidity, broader investor participation, and stronger integration with global capital markets compared to its frontier neighbors. However, institutional and political risks—particularly EU governance disputes—continue to inflate its risk premium above fundamentals. The results underscore how sovereign risk, market structure, and integration interact to shape equity valuations. The study concludes that targeted reforms aimed at enhancing governance and investor protections could lower Hungary’s risk premium and align it more closely with developed EU markets, offering a roadmap for peer economies undergoing similar transitions.
Implications for Central European audience: The paper provides a replicable framework for evaluating equity risk in post-socialist economies. Hungary’s example illustrates how institutional quality, liquidity, and policy credibility jointly influence investment outcomes. These insights can guide reforms and capital market strategies across Central and Eastern Europe.

Keywords: country risk premium; equity market valuation; emerging markets

Received: May 14, 2025; Revised: August 1, 2025; Accepted: December 18, 2025; Prepublished online: April 11, 2026 

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