The plausibility of risk estimates and implied costs to international equity investment

Lieven De Moor (), Piet Sercu () and Rosanne Vanpée ()
Additional contact information
Lieven De Moor: Katholieke Universiteit Leuven, Belgium
Piet Sercu: Katholieke Universiteit Leuven, Belgium
Rosanne Vanpée: Katholieke Universiteit Leuven, Belgium

No 2007/34, Working Papers from Hogeschool-Universiteit Brussel, Faculteit Economie en Management

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 general- ized by Sercu and Vanp¶ee (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, risk is 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 naïve 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 a la Bekaert and Harvey (1997) lead to implicit investment costs that are far more credible.

Pages: 37 pages
Date: 2007-06-25
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://lirias.hubrussel.be/handle/123456789/2201 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to lirias.hubrussel.be:80 (nodename nor servname provided, or not known)

Related works:
Journal Article: The plausibility of risk estimates and implied costs to international equity investments (2010)
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:hub:wpecon:200734

Access Statistics for this paper

More papers in Working Papers from Hogeschool-Universiteit Brussel, Faculteit Economie en Management Contact information at EDIRC.
Bibliographic data for series maintained by Sabine Janssens ( this e-mail address is bad, please contact ).