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An International Asset Pricing Model with Time-Varying Hedging Risk

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  • Chang, Jow-Ran
  • Hung, Mao-Wei

Abstract

This paper employs a two-factor international equilibrium asset pricing model to examine the pricing relationships among the world's five largest equity markets. In addition to the traditional market factor premium, a hedging factor premium is included as the second factor to explain the relationship between risks and returns in the international stock markets. Moreover, a GARCH parameterization is adopted to characterize the general dynamics of the conditional second moments. The results suggest that the additional hedging risk premium is needed to explain rates of return on international equities. Furthermore, the restriction that the coefficient on the hedge-portfolio covariance is one smaller than the coefficient on the market-portfolio covariance cannot be rejected. This suggests that the intertemporal asset pricing model proposed by Campbell (1993) can be used to explain the returns on the five largest stock market indices. Copyright 2000 by Kluwer Academic Publishers

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  • Chang, Jow-Ran & Hung, Mao-Wei, 2000. "An International Asset Pricing Model with Time-Varying Hedging Risk," Review of Quantitative Finance and Accounting, Springer, vol. 15(3), pages 235-257, November.
    • Handle: RePEc:kap:rqfnac:v:15:y:2000:i:3:p:235-57
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    Cited by:

    1. Yi-Cheng Shih & Sheng-Syan Chen & Cheng-Few Lee & Po-Jung Chen, 2014. "The evolution of capital asset pricing models," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 415-448, April.

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