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

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  • De Moor, Lieven

    ()
    (Katholieke Universiteit Leuven, Belgium
    Hogeschool-Universiteit Brussel (HUB), Belgium)

  • Sercu, Piet

    ()
    (Katholieke Universiteit Leuven, Belgium)

  • Vanpée, Rosanne

    ()
    (Katholieke Universiteit Leuven, Belgium)

Abstract

In this paper we reconsider the estimated deadweight costs for the emerging countries implied by the mean-variance portfolio model developed by Cooper and Kaplanis (1994) and general- ized by Sercu and Vanp¶ee (2007). We show both theoretically and empirically that estimated implicit investment costs are mostly driven by estimated risk if home bias is strong, which is particularly the case for emerging markets. For OECD countries, risk is stable and relatively easy to estimate, but for emerging markets ex post risk may be very different from ex ante risk and changes substantially over time. The required expected returns that go with the naïve risk estimates and are at the basis of the high implied costs of international equity investments defy credibility, whether a priori or empirically. We show that more sophisticated volatility estimates based on a time-varying model a la Bekaert and Harvey (1997) lead to implicit investment costs that are far more credible.

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Bibliographic Info

Paper provided by Hogeschool-Universiteit Brussel, Faculteit Economie en Management in its series Working Papers with number 2007/34.

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Length: 37 pages
Date of creation: 25 Jun 2007
Date of revision:
Handle: RePEc:hub:wpecon:200734

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Web page: http://research.hubrussel.be
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Cited by:
  1. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
  2. 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.
  3. Mishra, Anil, 2013. "Measures of Equity Home Bias Puzzle," MPRA Paper 51223, University Library of Munich, Germany.

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