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The Risky Capital of Emerging Markets

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  • Felix Gerding
  • Espen Henriksen
  • Ina Simonovska

Abstract

We build a panel of stock market returns across 37 developed and developing countries spanning five decades. We document: (1) higher and more volatile returns in poorer over richer countries; (2) higher returns in countries with more sensitive dividends to changes in global predictable growth. We quantitatively explore whether consumption-based long-run risk can reconcile these patterns. When we estimate the parameters that govern the U.S. investor’s consumption growth and each market’s dividend growth process, the model generates higher risk premia in emerging over developed markets, and predicts levels and volatilities of stock market returns that are at par with data.

Suggested Citation

  • Felix Gerding & Espen Henriksen & Ina Simonovska, 2014. "The Risky Capital of Emerging Markets," NBER Working Papers 20769, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20769
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    3. Hassan, Tarek A. & Mertens, Thomas M. & Zhang, Tony, 2016. "Not so disconnected: Exchange rates and the capital stock," Journal of International Economics, Elsevier, vol. 99(S1), pages 43-57.
    4. Claudio Borio & Piti Disyatat, 2015. "Capital flows and the current account: Taking financing (more) seriously," BIS Working Papers 525, Bank for International Settlements.
    5. Weithing Zhang & Thomas Mertens & Tarek Hassan, 2014. "Currency Manipulation," 2014 Meeting Papers 401, Society for Economic Dynamics.
    6. Tarek A Hassan & Thomas M Mertens & Tony Zhang, 2023. "A Risk-based Theory of Exchange Rate Stabilization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(2), pages 879-911.
    7. David, Joel M. & Schmid, Lukas & Zeke, David, 2022. "Risk-adjusted capital allocation and misallocation," Journal of Financial Economics, Elsevier, vol. 145(3), pages 684-705.
    8. Claudio Borio & Piti Disyatat, 2015. "Capital flows and the current account: Taking financing (more) seriously," BIS Working Papers 525, Bank for International Settlements.
    9. Wenxin Du & Carolin E. Pflueger & Jesse Schreger, 2016. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy," NBER Working Papers 22592, National Bureau of Economic Research, Inc.
    10. Friederike Niepmann, 2013. "Banking across borders with heterogeneous banks," Staff Reports 609, Federal Reserve Bank of New York.
    11. Wenxin Du & Carolin E. Pflueger & Jesse Schreger, 2020. "Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy," Journal of Finance, American Finance Association, vol. 75(6), pages 3097-3138, December.
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    13. Robert Inklaar & Pieter Woltjer & Daniel Gallardo Albarrán, 2019. "The Composition of Capital and Cross-Country Productivity Comparisons," International Productivity Monitor, Centre for the Study of Living Standards, vol. 36, pages 34-52, Spring.

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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