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Estimating the Costs of International Equity Investments

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  • Piet Sercu
  • Rosanne Vanpée

Abstract

Generalizing Cooper-Kaplanis (1994), we estimate implied costs that reconcile international portfolios with InCAPM predictions. Costs depend on home- and host-country characteristics and on interactions; we estimate risk tolerance rather than pre-specifying it; and we control for currency risk, inflation hedging, fixed-interest investments, round-tripping and omitted countries. Estimates for developed markets are lower than reported before, but those for new markets are quite high: 2001-2004 inward shadow costs range from 0.01 %p.a. (US) to 37 (Indonesia). We find that equity home bias is related to a mixture of risks and frictions, such as information asymmetries, institutional factors and explicit costs. Copyright 2008, Oxford University Press.

Suggested Citation

  • Piet Sercu & Rosanne Vanpée, 2008. "Estimating the Costs of International Equity Investments," Review of Finance, European Finance Association, vol. 12(4), pages 587-634.
    • Handle: RePEc:oup:revfin:v:12:y:2008:i:4:p:587-634
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    File URL: http://hdl.handle.net/10.1093/rof/rfn021
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    1. repec:hum:wpaper:sfb649dp2009-020 is not listed on IDEAS
    2. Sercu, Piet & Vanpée, Rosanne, 2011. "The Value of Clean Hands: How to Appeal to International Equity Investors," Working Papers 2011/26, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    3. Nicolas Coeurdacier & Hélène Rey, 2010. "Home bias in open economy financial macroeconomics," SciencePo Working papers hal-01069440, HAL.
    4. Zhang, Ning, 2023. "Asset home bias in debtor and creditor countries," Journal of Economic Dynamics and Control, Elsevier, vol. 157(C).
    5. De Moor, Lieven & Sercu, Piet & Vanpée, Rosanne, 2010. "The plausibility of risk estimates and implied costs to international equity investments," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 623-644, September.
    6. Mishra, Anil V. & Ratti, Ronald A., 2013. "Home bias and cross border taxation," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 169-193.
    7. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
    8. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    9. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    10. Möhlmann, Axel, 2013. "Investor home bias and sentiment about the country benefiting from the tax revenue," Journal of Economic Psychology, Elsevier, vol. 35(C), pages 31-46.
    11. Simon Bösenberg & Peter Egger & Benedikt Zoller-Rydzek, 2018. "Capital taxation, investment, growth, and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 325-376, April.
    12. Mishra, Anil V., 2017. "Foreign bias in Australia's international equity holdings," Review of Financial Economics, Elsevier, vol. 33(C), pages 41-54.
    13. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    14. Mishra, Anil V., 2014. "Australia's home bias and cross border taxation," Global Finance Journal, Elsevier, vol. 25(2), pages 108-123.
    15. Socaciu, Erzsébet-Mirjám & Nagy, Bálint-Zsolt & Benedek, Botond, 2023. "No place like home: Home bias and flight-to-quality in Group of Seven countries," Economic Modelling, Elsevier, vol. 129(C).
    16. Mishra, Anil V., 2015. "Measures of equity home bias puzzle," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 293-312.
    17. Hamano, Masashige, 2015. "International equity and bond positions in a DSGE model with variety risk in consumption," Journal of International Economics, Elsevier, vol. 96(1), pages 212-226.
    18. Marie Brière & Ariane Szafarz, 2021. "When it rains, it pours: Multifactor asset management in good and bad times," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 641-669, September.
    19. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    20. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    21. Siraj G. Bawa & Nam T. Vu, 2020. "International effects of corporate tax cuts on income distribution," Review of International Economics, Wiley Blackwell, vol. 28(5), pages 1164-1190, November.
    22. Ried, Stefan, 2009. "Putting up a good fight: The Galí-Monacelli model versus "The six major puzzles in international macroeconomics"," SFB 649 Discussion Papers 2009-020, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    23. Bodnaruk, Andriy & Simonov, Andrei, 2015. "Do financial experts make better investment decisions?," Journal of Financial Intermediation, Elsevier, vol. 24(4), pages 514-536.

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