Expected Returns and Volatility in 135 Countries
28 Pages Posted: 23 Dec 2005
Date Written: February 7, 1996
We analyze expected returns and volatility in 135 different markets. We argue that country credit risk is a proxy for the ex-ante risk exposure of, particularly, segmented developing countries. We fit a time-series cross-sectional regression using data on the 47 countries which have equity markets. These regressions predict both expected returns and volatility using credit risk as a single explanatory variable. We then use the credit rating data on the other 88 countries to project hurdle rates and volatility into the future. Finally, we calculate for each country, the expected time in years, given the forecasted country risk premium and volatility, for an investor to break even and double the initial investment - with 90% probability. This is the final working paper version of our 1996 Journal of Portfolio Management paper.
Keywords: International cost of capital, country hurdle rates, forecasting volatility, forecasting correlation, country rate of return, country risk, political risk, credit ratings, risk ratings, hitting time
JEL Classification: G12, G15, G31, F30, F37
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