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An International Dynamic Asset Pricing Model

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  • Robert Hodrick
  • David Ng
  • Paul Sengmueller

Abstract

We examine the ability of a dynamic asset-pricing model to explain the returns on G7-country stock market indices. We extend Campbell's (1996) asset-pricing model to investigate international equity returns. We also utilize and evaluate recent evidence on the predictability of stock returns. We find some evidence for the role of hedging demands in explaining stock returns and compare the predictions of the dynamic model to those from the static CAPM. Both models fail in their predictions of average returns on portfolios of high book-to-market stocks across countries. Copyright Kluwer Academic Publishers 1999

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File URL: http://hdl.handle.net/10.1023/A:1008713724886
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 6 (1999)
Issue (Month): 4 (November)
Pages: 597-620

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Handle: RePEc:kap:itaxpf:v:6:y:1999:i:4:p:597-620

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: capital asset pricing model (CAPM); international stock returns; intertemporal hedging;

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References

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  1. Owen Lamont, 1998. "Earnings and Expected Returns," Journal of Finance, American Finance Association, vol. 53(5), pages 1563-1587, October.
  2. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
  3. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
  4. Robert E. Cumby & John Huizinga, 1990. "Testing The Autocorrelation Structure of Disturbances in Ordinary Least Squares and Instrumental Variables Regressions," NBER Technical Working Papers 0092, National Bureau of Economic Research, Inc.
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  6. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  7. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  8. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  9. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
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  18. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  19. Bekaert, Geert & Hodrick, Robert J, 1992. " Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 467-509, June.
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Citations

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Cited by:
  1. Marina Emiris, 2002. "Measuring capital market integration," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 200-221 Bank for International Settlements.
  2. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
  3. Vuolteenaho, Tuomo & Campbell, John, 2004. "Bad Beta, Good Beta," Scholarly Articles 3122489, Harvard University Department of Economics.
  4. Martin Lettau & Sydney Ludvigson, 1999. "Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying," Staff Reports 93, Federal Reserve Bank of New York.
  5. Michael R. King & Dan Segal, 2003. "Valuation of Canadian- vs. U.S.-Listed Equity: Is There a Discount?," Working Papers 03-6, Bank of Canada.
  6. Cesare Robotti, 2001. "The price of inflation and foreign exchange risk in international equity markets," Working Paper 2001-26, Federal Reserve Bank of Atlanta.
  7. Gregory Connor & Oliver Linton, 2006. "Semiparametric Estimation of aCharacteristic-based Factor Model ofCommon Stock Returns," STICERD - Econometrics Paper Series /2006/506, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  8. Zhenyu Wang & Asani Sarkar & Kai Li, 1999. "Assessing the impact of short-sale constraints on the gains from international diversification," Staff Reports 89, Federal Reserve Bank of New York.
  9. Tobias Adrian & Erkko Etula, 2010. "Funding liquidity risk and the cross-section of stock returns," Staff Reports 464, Federal Reserve Bank of New York.
  10. Li, Kai & Sarkar, Asani & Wang, Zhenyu, 2003. "Diversification benefits of emerging markets subject to portfolio constraints," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 57-80, February.
  11. Tyler Muir & Erkko Etula & Tobias Adrian, 2011. "Broker-Dealer Leverage and the Cross-Section of Stock Returns," 2011 Meeting Papers 1448, Society for Economic Dynamics.

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