Expropriation Risk and Return in Global Equity Markets

35 Pages Posted: 16 Feb 2002

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Ravi Bansal

Duke University and NBER

Date Written: June 2002

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 1/2 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).

Note: Previously titled Sovereign Risk and Return in Global Equity Markets

Keywords: Sample Selectivity, Sovereign Risk, Peso Problem, World CAPM.

JEL Classification: F31, F34, G12, G15.

Suggested Citation

Dahlquist, Magnus and Bansal, Ravi, Expropriation Risk and Return in Global Equity Markets (June 2002). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=298180 or http://dx.doi.org/10.2139/ssrn.298180

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Ravi Bansal

Duke University and NBER ( email )

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

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