An Intertemporal International Asset Pricing Model: Theory and Empirical Evidence
Resource
European Financial Management 11 (2): 173-194
Journal
European Financial Management
Journal Volume
11
Journal Issue
2
Pages
173-194
Date Issued
2005
Date
2005
Author(s)
Abstract
We extend Campbell’s (1993) model to develop an intertemporal international asset pricing model (IAPM). We show that the expected international asset return is determined by a weighted average of market risk, market hedging risk, exchange rate risk and exchange rate hedging risk. These weights sum up to one. Our model explicitly separates hedging against changes in the investment opportunity set from hedging against exchange rate changes as well as exchange rate risk from intertemporal hedging risk. A test of the conditional version of our intertemporal IAPM using a multivariate GARCH process supports the asset pricing model. We find that the exchange rate risk is important for pricing international equity returns and it is much more important than intertemporal hedging risk. © 2005 Blackwell Publishing Ltd/Inc.
SDGs
Other Subjects
Asset pricing; Currency risk; G11; G12; G15; International finance; Intertemporal
Type
journal article