Expropriation Risk and Return in Global Equity Markets

Ravi Bansal and Magnus Dahlquist ()
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Magnus Dahlquist: Swedish Institute for Financial Research, Postal: Saltmätargatan 19A, SE-113 59 Stockholm, Sweden, http://www.sifr.org

No 8, SIFR Research Report Series from Institute for Financial Research

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. The lack of credible commitment to keep capital markets open (risk of expropriation) leads to this bias. We use the world CAPM for systematic risk and develop a model of 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 more than ½ 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: Sample Selectivity; Sovereign Risk; Peso Problem; World CAPM (search for similar items in EconPapers)
JEL-codes: F31 F34 G12 G15 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2002-11-15
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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