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An Evaluation of International Asset Pricing Models

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Author Info
Dahlquist, Magnus
Sallstrom, Torbjorn
Abstract

This Paper assesses the ability of international asset pricing models to explain the cross-sectional variation in expected returns. All the models considered seem to capture national market returns fairly well. Global portfolios sorted on earnings-price ratio and market value, however, pose a special challenge. We find that an unconditional inter national CAPM cannot explain the cross-sectional variation in these portfolio returns. Interestingly, a conditional international asset-pricing model that includes foreign exchange risk factors is able to explain a large part of the variation in average returns. Our empirical work suggests that this model has the same explanatory ability as an inter national three-factor model, where zero-cost portfolios based on earnings-price ratios and market values are used in addition to the world market portfolio. Importantly, the loadings associated with the zero-cost portfolios are driven out by the characteristics themselves, indicating a misspecification.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3145.

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Date of creation: Jan 2002
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Handle: RePEc:cpr:ceprdp:3145

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Keywords: characteristics; conditional information; foreign exchange risk; HML; SMB; World Capm;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jonathan Fletcher & Andrew Marshall, 2005. "An Empirical Examination of U.K. International Unit Trust Performance," Journal of Financial Services Research, Springer, vol. 27(2), pages 183-206, April. [Downloadable!] (restricted)
  2. Asgharian, Hossein & Karlsson, Sonnie, 2006. "Evaluating a nonlinear asset pricing model on international data," Working Papers 2006:5, Lund University, Department of Economics.
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