Sovereign Risk and Return in Global Equity Markets

40 Pages Posted: 20 Nov 2001

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Date Written: October 2001

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

JEL Classification: F31, F34, G12, G15

Suggested Citation

Bansal, Ravi and Dahlquist, Magnus, Sovereign Risk and Return in Global Equity Markets (October 2001). Available at SSRN: https://ssrn.com/abstract=290963

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
36
Abstract Views
1,660
PlumX Metrics