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Extracting the Nominal Risk-Free Rate from Stock Returns and the Purchasing Power Parity Hypothesis of the Won-Dollar Exchange Rate (in Korean)

Author

Listed:
  • Hyein Shim

    (Department of Economics, Chung-Ang University)

  • Heechae Ko

    (Department of International Economy, Korea Institute for International Economic Policy)

Abstract

The purpose of this paper is to extract the ex-post nominal risk-free rate from stock return through 'the Fama-French Three(Four) Factors Model' and verify the validation of 'PPP hypothesis of the Won/Dollar exchange rate. As a result of the empirical analysis, the PPP method based on the inflation extracted from the stock return is not able to bolster the establishment of the PPP hypothesis including the Asian Financial Crisis in 1997. However, in case of excluding the Asian Financial Crisis under the consideration of the structural change, the empirical test may be able to support the PPP hypothesis.

Suggested Citation

  • Hyein Shim & Heechae Ko, 2012. "Extracting the Nominal Risk-Free Rate from Stock Returns and the Purchasing Power Parity Hypothesis of the Won-Dollar Exchange Rate (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 18(3), pages 39-73, September.
    • Handle: RePEc:bok:journl:v:18:y:2012:i:3:p:39-73
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    More about this item

    Keywords

    Purchasing power parity Hypothesis; 3-factor model; stock returns;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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