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Exchange Rate And Foreign Inflation Risk Premiums In Global Equity Returns

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  • Vassalou, Maria
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    Abstract

    We test for the pricing of exchange rate and foreign inflation risk in equities. Our tests are motivated by the empirical implications of the models of Solnik (1974b) as revised by Sercu (1980), Grauer, Litzenberger, and Stehle (1976), and Adler and Dumas (1983). Both exchange rate and foreign inflation risk factors can explain part of the within-country cross-sectional variation in returns. Our results have important implications for hedging exchange rate risk. They also demonstrate that home bias, at least in US equity portfolios, cannot be the result of US investors' efforts to hedge their domestic inflation.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2448.

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    Date of creation: May 2000
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    Handle: RePEc:cpr:ceprdp:2448

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    Related research

    Keywords: Exchange Rate Risk Premiums; Foreign Inflation Risk Premiums; International Asset Pricing;

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    References

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    1. Siklos, Pierre L & Wohar, Mark E, 1997. "Convergence in Interest Rates and Inflation Rates across Countries and over Time," Review of International Economics, Wiley Blackwell, vol. 5(1), pages 129-41, February.
    2. Geert Bekaert & Robert J. Hodrick, 1992. "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," NBER Working Papers 3790, National Bureau of Economic Research, Inc.
    3. Stehle, Richard E, 1977. "An Empirical Test of the Alternative Hypotheses of National and International Pricing of Risky Assets," Journal of Finance, American Finance Association, vol. 32(2), pages 493-502, May.
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    17. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 363-376, September.
    18. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
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