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An Intertemporal International Asset Pricing Model: Theory and Empirical Evidence

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  • Jow-ran Chang
  • Vihang Errunza
  • Ked Hogan
  • Mao-wei Hung
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    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". Copyright Blackwell Publishing Ltd, 2005.

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    Bibliographic Info

    Article provided by European Financial Management Association in its journal European Financial Management.

    Volume (Year): 11 (2005)
    Issue (Month): 2 ()
    Pages: 173-194

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    Handle: RePEc:bla:eufman:v:11:y:2005:i:2:p:173-194

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    Cited by:
    1. Eiling, Esther & Gerard, Bruno & Hillion, Pierre & de Roon, Frans A., 2012. "International portfolio diversification: Currency, industry and country effects revisited," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1249-1278.
    2. Moerman, Gerard A. & van Dijk, Mathijs A., 2010. "Inflation risk and international asset returns," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 840-855, April.
    3. Chiou, Wan-Jiun Paul & Lee, Alice C. & Chang, Chiu-Chi A., 2009. "Do investors still benefit from international diversification with investment constraints?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 448-483, May.

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