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Global Financial Markets and the Risk Premium on U.S. Equity

  • K.C. Chan
  • G. Andrew Karolyi
  • Rene M. Stulz

We document that there is a significant foreign influence on the risk premium of U.S. assets. Using a bivariate GARCH-in-mean process for conditional expected excess returns, we find that the conditional expected excess return on U.S. stocks is positively related to the conditional covariance of the return of these stocks with the return on a foreign index but is not related to its own conditional variance. Further, we are unable to reject the international version of the CAPM. Evidence is presented for different model specifications, multiple-day returns and alternative proxies of foreign stock returns including the Nikkei 225 Stock Average, Morgan Stanley Japan and Morgan Stanley EAFE indices.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4074.

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Date of creation: May 1992
Date of revision:
Publication status: published as Journal of Financial Economics, (1992), p. 137-168
Handle: RePEc:nbr:nberwo:4074
Note: AP
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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