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Volatility Bounds for Stochastic Discount Factors on Global Stock Markets

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Drobetz, W. Volatility Bounds for Stochastic Discount Factors on Global Stock Markets. Journal of Contextual Economics – Schmollers Jahrbuch, 123(4), 471-500. https://doi.org/10.3790/schm.123.4.471
Drobetz, Wolfgang "Volatility Bounds for Stochastic Discount Factors on Global Stock Markets" Journal of Contextual Economics – Schmollers Jahrbuch 123.4, 2003, 471-500. https://doi.org/10.3790/schm.123.4.471
Drobetz, Wolfgang (2003): Volatility Bounds for Stochastic Discount Factors on Global Stock Markets, in: Journal of Contextual Economics – Schmollers Jahrbuch, vol. 123, iss. 4, 471-500, [online] https://doi.org/10.3790/schm.123.4.471

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Volatility Bounds for Stochastic Discount Factors on Global Stock Markets

Drobetz, Wolfgang

Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 123 (2003), Iss. 4 : pp. 471–500

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Drobetz, Wolfgang

Abstract

In this paper we address three main issues in international asset pricing. The first question is whether it is harder to simultaneously price international assets rather than domestic assets alone. The second objective is to investigate whether investors can enhance their risk-return spectrum through international diversification. To give a complete picture, our empirical tests are not restricted to stock markets of developed countries, but also include emerging stock markets. Third, we address the question whether currency risk plays an empirically significant role in international portfolio choice. All these issues are investigated exploiting the duality between volatility bounds for stochastic discount factors and the traditional mean-variance framework to derive spanning restrictions. The empirical results depend heavily on the set of stock markets and indicate that hedging significantly increase the risk-return spectrum faced by a global investor. However, when the goal is to maximize the benefits from international diversification, exploiting conditioning information turns out by far most important. Another interesting observation is that the times of the ‘diversification free lunch’ in emerging markets – if they ever existed – seem to be over.