Sovereign Risk and Return in Global Equity Markets

Magnus Dahlquist and Ravi Bansal

No 3034, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Standard asset pricing models have difficulty explaining cross-sectional differences in observed equity risk premia of developed and emerging markets. We argue that national equity returns are subject to sample selectivity and peso biases. The lack of credible commitment to keep capital markets open (risk of expropriation) leads to these biases. We develop a general equilibrium model for systematic risk (related to market risk and volatility risk) and sample selectivity. We find that after taking account of the sample selectivity bias, our model of systematic risk can account for the differences in risk premia quite well. We estimate the average expropriation risk to be about two-thirds of the ex-post risk premium for emerging economies and close to zero for developed economies. Further, we argue that the measured selectivity bias in equity premia provide valuable economic information regarding the incentives for sovereigns not to expropriate international investors. We find that the measured expropriation risk is related to reputations in capital markets (as argued in Eaton and Gersowitz, 1981) and to the magnitude of trade that an economy conducts (as argued in Bulow and Rogoff, 1989a, 1989b).

Keywords: Credibility; Dynamic general equilibrium model; International capm; Sample selectivity; Peso problems (search for similar items in EconPapers)
JEL-codes: F31 F34 G12 G15 (search for similar items in EconPapers)
Date: 2001-10
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP3034 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:3034

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3034

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().