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An Evaluation of International Asset Pricing Models

  • Dahlquist, Magnus
  • Sallstrom, Torbjorn
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    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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