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Expropriation Risk and Return in Global Equity Markets

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Author Info
Bansal, Ravi (Fuqua School of Business, Duke University)
Dahlquist, Magnus () (Swedish Institute for Financial Research)
Abstract

Standard asset pricing models have difficulty explaining cross-sectional differences in observed equity risk premia of developed and emerging markets. We argue that national equity returns are subject to sample selectivity. The lack of credible commitment to keep capital markets open (risk of expropriation) leads to this bias. We use the world CAPM for systematic risk and develop a model of sample selectivity. We find that after taking account of the sample selectivity bias, our model of systematic risk can account for the differences in risk premia quite well. We estimate the average expropriation risk to be more than ½ of the ex-post risk premium for emerging economies and close to zero for developed economies. Further, we argue that the measured selectivity bias in equity premia provide valuable economic information regarding the incentives for sovereigns not to expropriate international investors. We find that the measured expropriation risk is related to reputations in capital markets (as argued in Eaton and Gersowitz, 1981) and to the magnitude of trade that an economy conducts (as argued in Bulow and Rogoff, 1989a, 1989b).

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Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 8.

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Length: 35 pages
Date of creation: 15 Nov 2002
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Handle: RePEc:hhs:sifrwp:0008

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Related research
Keywords: Sample Selectivity; Sovereign Risk; Peso Problem; World CAPM;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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