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International Asset Pricing with Alternative Distributional Specifications

Journal of Empirical Finance , 1 (1993): 107-131

Campbell R. Harvey

Duke University, Durham, NC 27706 USA

Guofu Zhou

Washington University, St. Louis, MO 63130 USA


The unconditional mean- variance efficiency of the Morgan Stanley Capital International world equity index is investigated. Using data from 16 OECD countries and Hong Kong and maintaining the assumption of multivariate normality, we cannot reject the efficiency of the benchmark. However, residual diagnostics reveal significant departures from normality. We test the sensitivity of the results by specifying error structures that are t-distributed and mixtures of normal distributions. Even after relaxing the i.d.d. assumption, we cannot reject the mean-variance efficiency of the world portfolio. Our results suggest that differences in country risk exposure, measured against the MSCI world portfolio, will lead to differences in expected returns.