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Partial- vs general-equilibrium models of the international capital market

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  • Bernard Dumas

    (HEC Paris - Recherche - Hors Laboratoire - HEC Paris - Ecole des Hautes Etudes Commerciales)

Abstract

In this essay, I discuss and compare two ways of modeling international capital market equilibrium: the orthodox, general-equilibrium approach and the heterodox, partial-equilibrium CAPM (Capital Asset Pricing Model) approach. The benchmark for this comparison is the model's ability to provide an explanation for, or take into account, a number of stylized facts of international finance: UIRP deviations, home-equity preference, PPP deviations and their persistence, consumption behavior in relation to wealth. In addition, I ask which approach is more likely in future research to help us identify the relevant state variables of the economy. None of the models satisfactorily explains the stylized facts but the CAPM approach affords the most productive avenue for empirical research in the immediate future.
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Suggested Citation

  • Bernard Dumas, 1993. "Partial- vs general-equilibrium models of the international capital market," Working Papers hal-00610766, HAL.
    • Handle: RePEc:hal:wpaper:hal-00610766
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    Cited by:

    1. Charles M. Engel, 1994. "Tests of CAPM on an International Portfolio of Bonds and Stocks," NBER Chapters, in: The Internationalization of Equity Markets, pages 149-183, National Bureau of Economic Research, Inc.
    2. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    3. Herrmann, Sabine & Jochem, Axel, 2003. "Die internationale Intregration der Devisenmärkte in den mittel- und osteuropäischen Beitrittsländern: Spekulative Effizienz, Transaktionskosten und Wechselkursprämien," Discussion Paper Series 1: Economic Studies 2003,08, Deutsche Bundesbank.
    4. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Books, National Bureau of Economic Research, Inc, number fran94-1, March.
    5. Frankel, Jeffrey A., 1994. "The Internalization of Equity Markets: Introduction," Center for International and Development Economics Research (CIDER) Working Papers 233216, University of California-Berkeley, Department of Economics.
    6. Ram Bhar & Carl Chiarella & Toan Pham, 2000. "Modeling the Currency Forward Risk Premium: Theory and Evidence," Research Paper Series 41, Quantitative Finance Research Centre, University of Technology, Sydney.
    7. Godwin Nwaobi, 2005. "Securities Markets And Social Capital Integration In Africa: Risks And Policy Options," Finance 0512019, University Library of Munich, Germany.
    8. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    9. Jeffrey A. Frankel, 1994. "Introduction to "The Internationalization of Equity Markets "," NBER Chapters, in: The Internationalization of Equity Markets, pages 1-20, National Bureau of Economic Research, Inc.
    10. Manzoor, Davood & Haqiqi, Iman & Aghababaei, Mohammad, 2012. "Modeling Dutch Disease in the Economy of Iran: A Computable General Equilibrium Approach," MPRA Paper 95821, University Library of Munich, Germany.

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