Application of intertemporal CAPM on international corporate finance
Journal
Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)
Pages
485-517
Date Issued
2020
Author(s)
Abstract
This chapter discusses both intertemporal asset pricing model and international asset pricing model (IAPM) in detail. In intertemporal asset pricing model we discuss Campbell (1993) model which assumes that investors are assumed to be endowed with Kreps- Porteus utility and consumption is substituted out from the model. In addition, it extends Campbell’s (1993) model to develop an intertemporal 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. 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. ? 2021 by World Scientific Publishing Co. Pte. Ltd.
SDGs
Type
book part