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Review of Finance Advance Access originally published online on August 22, 2008
Review of Finance 2008 12(4):587-634; doi:10.1093/rof/rfn021
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© The Author 2008.
This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/2.0/uk/) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.

Estimating the Costs of International Equity Investments*

Piet Sercu1 and Rosanne Vanpée2

1 K.U. Leuven
2 Fortis Investments

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.

JEL Classification: G11, G15, F36

* Rosanne Vanpée gratefully acknowledges financial support from the Fonds for Wetenschappelijk Onderzoek-Vlaanderen (FWO-Vlaanderen). We thank Peter Schotman, Ian Cooper, Constant Beckers, Hans Dewachter, Bartolomé Pascual-Fuster, Mramor Dusan and participants in workshops at KU Leuven, CERGE-EI Prague, University of Namur, and at the 2006 EFMA Annual Meeting for useful comments and criticisms. We especially thank the anonymous referees, whose comments substantially improved the text. All remaining errors are the authors'.


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