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The World Price of Foreign Exchange Risk

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  • Dumas, Bernard
  • Solnik, Bruno

Abstract

Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This article investigates whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia. Copyright 1995 by American Finance Association.

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  • Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
  • Handle: RePEc:bla:jfinan:v:50:y:1995:i:2:p:445-79
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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