Estimating the Costs of International Equity Investments

49 Pages Posted: 6 Mar 2008

See all articles by Piet Sercu

Piet Sercu

FEB at KU Leuven

Rosanne Vanpee

KU Leuven Faculty of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2007

Abstract

We generalize the Cooper and Kaplanis (1994) methodology for estimating the costs that could reconcile international portfolio holdings with CAPM predictions. First, we can simultaneously estimate inward and outward investment costs and even interactions between home and host country. Second, the risk aversion parameter is estimated rather than postulated. Third, we control for exchange rate risk, inflation hedging, fixed-interest investments, round-tripping and omitted countries. Our estimates of implicit investment costs for the developed countries are much lower than those reported in prior studies. Over the period 2001-2004, our estimates of the average inward shadow costs range from 0.01 (US) to 37 (Indonesia) percent per annum. We find that the equity home bias is related to a mixture of market frictions, such as information asymmetries, institutional factors and explicit costs.

Keywords: international portfolio diversification, information asymmetries, international CAPM, equity home bias

JEL Classification: G11, G15, F36

Suggested Citation

Sercu, Piet M. F. A. and Vanpee, Rosanne, Estimating the Costs of International Equity Investments (November 30, 2007). Available at SSRN: https://ssrn.com/abstract=1102405 or http://dx.doi.org/10.2139/ssrn.1102405

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Rosanne Vanpee (Contact Author)

KU Leuven Faculty of Economics and Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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