International Asset Pricing with Alternative Distributional Specifications
Washington University in St. Louis - Olin School of Business
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
The unconditional mean-variance efficiency of the Morgan Stanley Capital International world equity index is investigated. Using data from 16 OECD countries and Hong Kong and maintaining the assumption of multivariate normality, we cannot reject the efficiency of the benchmark. However, residual diagnostics reveal significant departures from normality. We test the sensitivity of the results by specifying error structures that are t-distributed and mixtures of normal distributions. Even after relaxing the i.d.d. assumption, we cannot reject the mean-variance efficiency of the world portfolio. Our results suggest that differences in country risk exposure, measured against the MSCI world portfolio, will lead to differences in expected returns.
This is the final working paper version of our 1993 publication in the Journal of Empirical Finance.
Number of Pages in PDF File: 34
Keywords: International asset pricing, CAPM, mean-variance efficiency, alternative distributions, mixtures of normals
JEL Classification: G15, G11, G12
Date posted: October 31, 2005
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