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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.

Suggested Citation

  • De Moor, Lieven & Sercu, Piet & Vanpée, Rosanne, 2010. "The plausibility of risk estimates and implied costs to international equity investments," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 623-644, September.
  • Handle: RePEc:eee:empfin:v:17:y:2010:i:4:p:623-644
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    2. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    3. repec:eee:revfin:v:33:y:2017:i:c:p:41-54 is not listed on IDEAS
    4. 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.
    5. Mishra, Anil V. & Ratti, Ronald A., 2013. "Home bias and cross border taxation," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 169-193.
    6. Mishra, Anil V., 2016. "Foreign bias in Australian-domiciled mutual fund holdings," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 101-123.
    7. repec:kap:atlecj:v:45:y:2017:i:1:d:10.1007_s11293-017-9532-z is not listed on IDEAS
    8. Kim, Heeho & Cho, Seong-Hoon & Kim, Yongku, 2015. "Home bias, risk differential, and cultural spatial spillover effects," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 114-136.

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