Expropriation Risk and Return in Global Equity Markets

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).Sample Selectivity; Sovereign Risk; Peso Problem; World CAPM

Pseudo Market Timing: Fact or Fiction?

The average firm going public or issuing new equity has underperformed the market in the long run. Endogeneity of the number of new issues has been proposed as a potential explanation of this long-run underperformance. Under pseudo market timing of new issues, ex post measures of average abnormal returns may be negative on average despite zero ex ante abnormal returns. We show that, under reasonable stationarity assumptions on the process generating events, traditional measures of average abnormal returns are consistent, and the pseudo market timing effect is a small sample problem. In simulations of an empirical model we demonstrate that the bias is small even in moderate sample sizes. An abnormal return measure capturing a feasible investment strategy is not biased. We argue that it is unlikely that pseudo market timing is the explanation for the long-run underperformance in equity issuances.Abnormal return measures; Endogenous events; Event studies; Initial public offerings; Long-run underperformance

Direct Evidence of Dividend Tax Clienteles

We study a large data set of stock portfolios held by individuals and organizations in the Swedish stock market. The dividend yields on these port-folios are systematically related to investors' relative tax preferences for dividends versus capital gains. Tax-neutral investors earn 40 basis points higher dividend yield on their portfolios than investors which face higher effective taxation of dividends than capital gains. We conclude that there are dividend tax clienteles in the market. We also argue that the abundant portfolio holdings by private corporations, despite triple taxation at a combined marginal tax rate as high as 77.5%, is a consequence of taxation.Tax incidence; dividend tax clienteles; capital gains tax; stock ownership

Dynamic Trading Strategies and Portfolio Choice

Traditional mean-variance efficient portfolios do not capture the potential wealth creation opportunities provided by predictability of asset returns. We propose a simple method for constructing optimally managed portfolios that exploits the possibility that asset returns are predictable. We implement these portfolios in both single and multi-period horizon settings. We compare alternative portfolio strategies which include both buy-and-hold and fixed weight portfolios. We find that managed portfolios can significantly improve the mean-variance trade-off, in particular, for investors with investment horizons of three to five years. Also, in contrast to popular advice, we show that the buy-and-hold strategy should be avoided.Dynamic strategies; mean-variance optimization; multiperiod choice; efficient frontier; buy-and-hold investment

Dynamic Trading Strategies and Portfolio Choice

Traditional mean-variance efficient portfolios do not capture the potential wealth creation opportunities provided by predictability of asset returns. We propose a simple method for constructing optimally managed portfolios that exploits the possibility that asset returns are predictable. We implement these portfolios in both single and multi-period horizon settings. We compare alternative portfolio strategies which include both buy-and-hold and fixed weight portfolios. We find that managed portfolios can significantly improve the mean-variance trade-off, in particular, for investors with investment horizons of three to five years. Also, in contrast to popular advice, we show that the buy-and-hold strategy should be avoided.

Corporate Governance and the Home Bias

This paper shows that there is a close relation between corporate governance and the portfolios held by investors. Most firms in countries with poor investor protection are controlled by large shareholders, so that only a fraction of the shares issued by firms in these countries can be freely traded and held by portfolio investors. We show that the prevalence of closely-held firms in most countries helps explain why these countries exhibit a home bias in share holdings and why U.S. investors underweight foreign countries in their portfolios. We construct an estimate of the world portfolio of shares available to investors who are not controlling shareholders (the world float portfolio). The world float portfolio differs sharply from the world market portfolio. In regression explaining the portfolio weights of U.S. investors, the world float portfolio has a positive significant coefficient but the world market portfolio has no additional explanatory power. This result holds when we control for country characteristics. An analysis of foreign investor holdings at the firm level for Sweden confirms the importance of the float portfolio as a determinant of these holdings.World float portfolio; Portfolio choice; Closely held shares