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Expected Returns and Volatility in 135 Countries

Journal of Portfolio Management (1996): Spring, 46-58.

Claude B. Erb
First Chicago Investment Management Co., Chicago, IL

Campbell R. Harvey
Duke University, Durham, NC 27708
National Bureau of Economic Research, Cambridge, MA

Tadas E. Viskanta
First Chicago Investment Management Co., Chicago, IL


We analyze expected returns and volatility in 135 different markets. We argue that country credit risk is a proxy for the ex-ante risk exposure of, particularly, segmented developing countries. We fit a time-series cross-sectional regression using data on the 47 countries which have equity markets. These regression predict both expected returns and volatility using credit risk as a single explanatory variable. We then use the credit rating data on the other 88 countries to project hurdle rates and volatility into the future. Finally, we calculate for each country, the expected time in years, given the forecasted country risk premium and volatility, for an investor to break even and double the initial investment - with 90% probability.