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The role of exchange rates in intertemporal risk-return relations

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  • Bali, Turan G.
  • Wu, Liuren

Abstract

This paper investigates the significance of an intertemporal relation between expected returns on countries' stock market portfolios and their risk exposures to the world market portfolio. We find that the intertemporal risk-return relation differs significantly under different currency denominations. The slope coefficient is the largest at around seven when the returns are denominated in Japanese yen, moderate at about five when the returns are denominated in the Canadian or US dollars, and the smallest at around three when the returns are denominated in pound or euro and its predecessors. The ranking of the risk-return coefficients across different currency denominations remains the same when we replace country equity indices with global industry portfolios in estimating the intertemporal relations, when we change the return frequency from monthly to daily, and when we consider different specifications for the conditional covariance process.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 8 (December)
Pages: 1670-1686

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:8:p:1670-1686

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Exchange rate International capital asset pricing Conditional covariance Risk aversion;

References

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Cited by:
  1. Sun, Yiguo & Hsiao, Cheng & Li, Qi, 2011. "Measuring correlations of integrated but not cointegrated variables: A semiparametric approach," Journal of Econometrics, Elsevier, vol. 164(2), pages 252-267, October.

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