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The plausibility of risk estimates and implied costs to international equity investments

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  • De Moor, Lieven
  • Sercu, Piet
  • Vanpée, Rosanne

Abstract

We reconsider the costs to international equity investments implied by standard portfolio theory (Cooper and Kaplanis, 1994; Sercu and Vanpée, 2008). Estimated costs are mostly driven by risk estimates, not by asset holdings. For OECD markets, risks are fairly stable and relatively easy to estimate, but for emerging markets this is not the case. Many required expected returns implied by unconditional risk estimates defy credibility, both a priori and empirically. More sophisticated volatility estimates based on a dynamic risk model a la Bekaert and Harvey (1997) lead to implicit costs that are far more credible, but the results remain fragile.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 17 (2010)
Issue (Month): 4 (September)
Pages: 623-644

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Handle: RePEc:eee:empfin:v:17:y:2010:i:4:p:623-644

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Home bias Investment costs Information Emerging markets Risk estimates GARCH;

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References

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Cited by:
  1. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
  2. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
  3. Mishra, Anil, 2013. "Measures of Equity Home Bias Puzzle," MPRA Paper 51223, University Library of Munich, Germany.

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