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An Intertemporal International Asset Pricing Model: Theory and Empirical Evidence
Author(s) -
Chang Jowran,
Errunza Vihang,
Hogan Ked,
Hung Maowei
Publication year - 2005
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1354-7798.2005.00281.x
Subject(s) - economics , arbitrage pricing theory , capital asset pricing model , consumption based capital asset pricing model , financial economics , investment theory , empirical evidence , econometrics , asset (computer security) , computer science , philosophy , computer security , epistemology
We extend Campbell's (1993) model to develop an intertemporal international asset pricing model (IAPM). We show that the expected international asset return is determined by a weighted average of market risk, market hedging risk, exchange rate risk and exchange rate hedging risk. These weights sum up to one. Our model explicitly separates hedging against changes in the investment opportunity set from hedging against exchange rate changes as well as exchange rate risk from intertemporal hedging risk. A test of the conditional version of our intertemporal IAPM using a multivariate GARCH process supports the asset pricing model. We find that the exchange rate risk is important for pricing international equity returns and it is much more important than intertemporal hedging risk .