The International Pricing of Risk: An Empirical Investigation of the World Capital Market Structure

The World Price of Covariance Risk

“…3However, this does not imply that real returns are independent of inflation. Evidence on the relation between stock returns and inflation is presented in Gultekin (1983) and Solnik (1983). 4Sufficient distributional conditions that imply linear conditional expectations involve the joint distribution of the returns and the information variables falling into the class of spherically invariant distributions.…”

International portfolio diversification: an ICAPM approach with currency risk

“…Compared to nominal GDP, China is 2 nd after USA and India 11 th after seven developed countries China, Brazil and Russia. 2 For early studies documenting the benefits of international diversification, see Solnik (1974) for developed markets and Errunza (1977) for emerging markets. For more recent evidence, see for example Erb, Harvey and Viskanta (1994), DeSantis and Gerard (1997) and Bekaert and Harvey (2000).…”

On the estimation of the cost of equity in Latin America

“…In fact, as Latin American countries opened up its capital markets to foreign investors and let its residents invest abroad, the question of how much of the individual stock risk borne by Latin American firms is correlated with global risk factors became pervasive. Our results suggested that global factors do not add explanatory power to domestic portfolios in the adjusted CAPM regressions, which may indicate that a significant fraction of regional stock market risk is indeed correlated with global risk and hence that local market portfolios are already capturing the relevant sources of global risk In other words, these results would imply no additional gains from diversifying away from the country market portfolios and into foreign stock and/or currency assets portfolios or possibly the other way around should we have tested an international adjusted CAPM (Sercu, 1980, Solnik, 1974 and then added the domestic market in the pricing equation. Other potential explanations could be the presence of a home bias or country barriers to investment in foreign stocks such as taxes, capital controls or currency inconvertibility that would prevent local investors to diversify their portfolios internationally.…”

“…20 Solnik (1974), Sercu (1980 and1981) and Adler and Dumas (1983) demonstrated that in a fully mobile capital world investors hold internationally diversified portfolios of risky assets and regard the risky security choices by how (in terms of risk and returns) they contribute to their internationally diversified portfolios.…”