SIFR Research Report Series, Institute for Financial Research
Ravi Bansal and Magnus Dahlquist
Expropriation Risk and Return in Global Equity Markets
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 ½ 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: Sample Selectivity; Sovereign Risk; Peso Problem; World CAPM; (follow links to similar papers)
JEL-Codes: F31; F34; G12; G15; (follow links to similar papers)
35 pages, November 15, 2002
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Anki Helmer ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom