An International Asset Pricing Model with Time-Varying Hedging Risk
Resource
Review of Quantitative Finance and Accountin 15 (3): 235-257
Journal
Review of Quantitative Finance and Accountin
Journal Volume
15
Journal Issue
3
Pages
235-257
Date Issued
2000
Date
2000
Author(s)
Chang, Jow-Ran
Abstract
This paper employs a two-factor international equilibrium asset pricing model to examine the pricing relationships among the world's five largest equity markets. In addition to the traditional market factor premium, a hedging factor premium is included as the second factor to explain the relationship between risks and returns in the international stock markets. Moreover, a GARCH parameterization is adopted to characterize the general dynamics of the conditional second moments. The results suggest that the additional hedging risk premium is needed to explain rates of return on international equities. Furthermore, the restriction that the coefficient on the hedge-portfolio covariance is one smaller than the coefficient on the market-portfolio covariance can not be rejected. This suggests that the intertemporal asset pricing model proposed by Campbell (1993) can be used to explain the returns on the five largest stock market indices. © 2000 Kluwer Academic Publishers.
Subjects
GARCH; Hedging risk; International asset pricing
Type
journal article