International Asset Pricing and Portfolio Diversification with Time-Varying Risk

Giorgio De Santis and Bruno Gerard

Journal of Finance, 1997, vol. 52, issue 5, 1881-1912

Abstract: The authors test the conditional capital asset pricing model (CAPM) for the world's eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) parameterization. Their methodology can be applied simultaneously to many assets and, at the same time, accommodate general dynamics of the conditional moments. The evidence supports most of the pricing restrictions of the model, but some of the variation in risk-adjusted excess returns remains predictable during periods of high interest rates. The authors' estimates indicate that, although severe market declines are contagious, the expected gains from international diversification for a U.S. investor average 2.11 percent per year and have not significantly declined over the last two decades. Copyright 1997 by American Finance Association.

Date: 1997
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