Title: The plausibility of risk estimates and implied costs tointernational equity investment
Authors: De Moor, Lieven
Sercu, Piet
VanpƩe, Rosanne
Issue Date: 2007
Publisher: K.U.Leuven - Faculty of Economics and Applied Economics
Series Title: DTEW - AFI_708 pages:1-36
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 generalized by Sercu and Vanpee (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, riskis 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 naive 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 ala Bekaert and Harvey (1997) lead to implicit investment costs that are far more credible
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center International Finance, Leuven
Research Centre for Finance, Accountancy & Tax, Campus Brussels (-)
Faculty of Economics and Business (FEB) - miscellaneous

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