The effect of market regulation on equity returns: evidence from the electricity sector

This thesis investigates the existence of a regulatory risk premium for stocks of electricity firms in the European Union. It shows that regulation leads to asymmetrical returns and a smaller equity beta. This is measured by applying an extended form of the Capital Asset Pricing Model (CAPM) that includes factors for coskewness and size. In addition, it shows that coskewness captures a local regulatory risk factor. On average, the regulatory risk premium is negative and is equal to -0.99% per year. For the individual case of TenneT, the national transmission system operator in the Netherlands, the regulatory risk premium is positive and is 1.22% per year. Data in this thesis will show that this premium has a large effect on the revenues of TenneT.