The price of inflation and foreign exchange risk in international equity markets
AbstractIn this paper the author formulates and tests an international intertemporal capital asset pricing model in the presence of deviations from purchasing power parity (II-CAPM [PPP]). He finds evidence in favor of at least mild segmentation of international equity markets in which only global market risk appears to be priced. When using the Hansen & Jagannathan (1991, 1997) variance bounds and distance measures as testing devices, the author finds that, while all international asset pricing models are formally rejected by the data, their pricing implications are substantially different. The superior performance of the II-CAPM (PPP) is mainly attributable to significant hedging against inflation risk.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2001-26.
Date of creation: 2001
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-10 (All new papers)
- NEP-FMK-2002-02-15 (Financial Markets)
- NEP-IFN-2002-02-15 (International Finance)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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