The Risky Capital of Emerging Markets

52 Pages Posted: 14 Jan 2015

See all articles by Joel David

Joel David

Federal Reserve Bank of Chicago

Espen Henriksen

Department of Financial Economics, BI Norwegian Business School

Ina Simonovska

University of California - Davis; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2014

Abstract

Emerging markets exhibit high returns to capital, the ‘Lucas Paradox,’ alongside volatile growth rate regimes. We investigate the role of long-run risks, i.e., risk due to fluctuations in economic growth rates, in leading to return differentials across countries. We take the perspective of a US investor and outline an empirical strategy to identify risky growth shocks and quantify their implications. Long-run risks account for 60-70% of the observed return disparity between the US and a group of the poorest countries. At the individual country level, our model predicts average returns that are highly correlated with those in the data (0.61).

Keywords: Lucas Paradox, emerging markets, returns to capital, long-run risk, asset pricing puzzles

JEL Classification: O4, E22, F21, G12

Suggested Citation

David, Joel and Henriksen, Espen and Simonovska, Ina, The Risky Capital of Emerging Markets (December 13, 2014). CAFE Research Paper No. 15.02, Available at SSRN: https://ssrn.com/abstract=2548827

Joel David (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Espen Henriksen

Department of Financial Economics, BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Ina Simonovska

University of California - Davis ( email )

1 Shields Ave
Davis, CA 95616
United States

HOME PAGE: http://inasimonovska.weebly.com/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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