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An International Arbitrage Pricing Model with PPP Deviations

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  • Levine, Ross

Abstract

This paper derives an intertemporal, international arbitrage pricing model that relaxes more assumptions than previous asset pricing paradigms. The analysis shows how risk, risk premia, and the translation of these variables between all real and nominal numeraires depend upon a small number of stochastic state variables that define the economy's production and credit opportunities. When the model is applied to the forward exchange market, it highlights the potentially central role of real exchange rates in determining the evolution of forward exchange risk premia. Copyright 1989 by Oxford University Press.

Suggested Citation

  • Levine, Ross, 1989. "An International Arbitrage Pricing Model with PPP Deviations," Economic Inquiry, Western Economic Association International, vol. 27(4), pages 587-599, October.
    • Handle: RePEc:oup:ecinqu:v:27:y:1989:i:4:p:587-99
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    1. Hodrick, Robert J. & Srivastava, Sanjay, 1984. "An investigation of risk and return in forward foreign exchange," Journal of International Money and Finance, Elsevier, vol. 3(1), pages 5-29, April.
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    Cited by:

    1. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Market Development and Financial Intermediaries: Stylized Facts," The World Bank Economic Review, World Bank, vol. 10(2), pages 291-321, May.
    2. Korajczyk, Robert A, 1996. "A Measure of Stock Market Integration for Developed and Emerging Markets," The World Bank Economic Review, World Bank, vol. 10(2), pages 267-289, May.
    3. Ng, David T., 2004. "The international CAPM when expected returns are time-varying," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 189-230, March.
    4. Bernard Dumas, 1993. "Partial- Vs. General-Equilibrium Models of the International Capital Market," NBER Working Papers 4446, National Bureau of Economic Research, Inc.
    5. Levine, Ross, 1989. "The pricing of forward exchange rates," Journal of International Money and Finance, Elsevier, vol. 8(2), pages 163-179, June.
    6. Mika Vaihekoski, 2000. "Unconditional international asset pricing models: empirical tests," Finnish Economic Papers, Finnish Economic Association, vol. 13(2), pages 71-88, Autumn.

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