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Country Risk and International Portfolio Diversification

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The purpose of the paper is to find out if the pricing of international loans can be explained by the Capital Asset Pricing Model. An empirical test that includes a set of 33 developing countries during the period 1971-1984 is undertaken. The data also permits a calculation of expected returns using a non-linear probit model to identify the probabilities of default. The results suggest that a certain degree of diversification holds, while non-diversifiable systematic risk contributes to the explanation of market risk premiums. However, the CAPM model cannot fully account for the variation in the observed risk premia. Other factors may also contribute to the pricing of loans. In particular, the absence of secondary markets during the estimation period may explain the divergence of actual behavior from that implied by the CAPM framework.

Suggested Citation

  • Balkan, Erol M. & Erol, Umit, 1995. "Country Risk and International Portfolio Diversification," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 48(1), pages 1-12.
    • Handle: RePEc:ris:ecoint:0403
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    Cited by:

    1. Chakraborty, Lekha, 2012. "Determination of Interest Rate in India: Empirical Evidence on Fiscal Deficit-Interest Links and Financial Crowding Out," Working Papers 12/110, National Institute of Public Finance and Policy.
    2. Lekha S. Chakraborty, 2012. "Interest Rate Determination in India: Empirical Evidence on Fiscal Deficit--Interest Rate Linkages and Financial Crowding Out," Economics Working Paper Archive wp_744, Levy Economics Institute.

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