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International asset returns and exchange rates

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  • Yuming Li
  • Maosen Zhong

Abstract

We present a consumption-based international asset-pricing model to study global equity premiums, the US riskfree rate and the cross section of international asset returns. The model entails idiosyncratic, country-specific consumption risk, which helps explain the magnitude of global equity premiums. It also features country-specific habit formation, which helps explain the level of the interest rate on the US short-term Treasury bills traded by domestic and international investors. We find that the model explains approximately 40-50% of the cross section of currency and equity premiums as well as expected returns from value and growth portfolios of at least a dozen countries. Changes in real exchange rates are responsible for explaining approximately half of the cross section of international asset returns.

Suggested Citation

  • Yuming Li & Maosen Zhong, 2009. "International asset returns and exchange rates," The European Journal of Finance, Taylor & Francis Journals, vol. 15(3), pages 263-285.
    • Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:263-285
    DOI: 10.1080/13518470802423429
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    Cited by:

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    2. Lan, Jun & Malik, Arunima & Lenzen, Manfred & McBain, Darian & Kanemoto, Keiichiro, 2016. "A structural decomposition analysis of global energy footprints," Applied Energy, Elsevier, vol. 163(C), pages 436-451.
    3. Benjamin R. Auer, 2013. "Can habit formation under complete market integration explain the cross‐section of international equity risk premia?," Review of Financial Economics, John Wiley & Sons, vol. 22(2), pages 61-67, April.
    4. Victoria Atanasov, 2014. "Common Risk Factors in Equity Markets," Tinbergen Institute Discussion Papers 14-070/IV, Tinbergen Institute.
    5. Pillay, Timesh D. & Skordis-Worrall, Jolene, 2013. "South African health financing reform 2000–2010: Understanding the agenda-setting process," Health Policy, Elsevier, vol. 109(3), pages 321-331.
    6. Rojo Suárez, Javier & Alonso Conde, Ana Belén & Ferrero Pozo, Ricardo, 2020. "European equity markets: Who is the truly representative investor?," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 325-346.
    7. Bali, Turan G. & Cakici, Nusret, 2010. "World market risk, country-specific risk and expected returns in international stock markets," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1152-1165, June.
    8. Darrat, Ali F. & Li, Bin & Park, Jung Chul, 2011. "Consumption-based CAPM models: International evidence," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2148-2157, August.

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