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The Risky Capital of Emerging Markets

Author

Listed:
  • Ina Simonovska

    (University of California, Davis)

  • Espen Henriksen

    (UC Davis)

  • Joel David

    (USC)

Abstract

Poor and emerging markets exhibit (1) high average returns to capital and (2) large exposures to movements in US returns, measured by the ‘beta’ of the returns to the foreign asset on the returns to its US counterpart. We document these facts in detail for two asset classes - stock market returns and the return to aggregate capital - and we provide further evidence from a third class - sovereign bonds. We use a series of endowment economies to explore whether consumption-based risk faced by a US investor can reconcile these findings. We find that long-run risk, i.e., risk due to uncertainty over economic growth rates abroad, is a promising channel - our calibrated model implies return disparities at least 55% as large as those in the data. From the perspective of the US investor, fact (2), although not a sufficient statistic, is informative about the extent of long-run risk in foreign assets, and so about fact (1).

Suggested Citation

  • Ina Simonovska & Espen Henriksen & Joel David, 2016. "The Risky Capital of Emerging Markets," 2016 Meeting Papers 125, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:125
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    References listed on IDEAS

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    Cited by:

    1. David, Joel M. & Simonovska, Ina, 2016. "Correlated beliefs, returns, and stock market volatility," Journal of International Economics, Elsevier, vol. 99(S1), pages 58-77.
    2. 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.
    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. Friederike Niepmann, 2016. "Banking Across Borders With Heterogeneous Banks," International Finance Discussion Papers 1177, Board of Governors of the Federal Reserve System (U.S.).
    5. Claudio Borio & Piti Disyatat, 2015. "Capital flows and the current account: Taking financing (more) seriously," BIS Working Papers 525, Bank for International Settlements.
    6. Weithing Zhang & Thomas Mertens & Tarek Hassan, 2014. "Currency Manipulation," 2014 Meeting Papers 401, Society for Economic Dynamics.
    7. Friederike Niepmann, 2013. "Banking across borders with heterogeneous banks," Staff Reports 609, Federal Reserve Bank of New York.
    8. Friederike Niepmann, 2013. "Banking across borders with heterogeneous banks," Staff Reports 609, Federal Reserve Bank of New York.

    More about this item

    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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