Working Paper: NBER ID: w20769
Authors: Joel M. David; Espen Henriksen; Ina Simonovska
Abstract: We build a panel of stock market returns across 37 developed and developing countries spanning five decades. We document: (1) higher and more volatile returns in poorer over richer countries; (2) higher returns in countries with more sensitive dividends to changes in global predictable growth. We quantitatively explore whether consumption-based long-run risk can reconcile these patterns. When we estimate the parameters that govern the U.S. investor’s consumption growth and each market’s dividend growth process, the model generates higher risk premia in emerging over developed markets, and predicts levels and volatilities of stock market returns that are at par with data.
Keywords: capital returns; emerging markets; long-run risks; US returns; international finance
JEL Codes: E22; F21; G12; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic conditions (poor and emerging markets) (F61) | average returns to capital (D33) |
| income (E25) | average returns (G12) |
| expected returns (G17) | country's beta on US returns (C46) |
| long-run risks associated with economic growth prospects (E66) | spread in expected returns (G17) |
| income levels (J31) | expected returns (G17) |