Are financial assets priced locally or globally?

G. Karolyi and René Stulz

Chapter 16 in Handbook of the Economics of Finance, 2003, vol. 1, Part 2, pp 975-1020 from Elsevier

Abstract: We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset-pricing models with mean-variance investors predict that an asset's risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country's risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset-pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase global influences on asset prices.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (245)

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Related works:
Working Paper: Are Financial Assets Priced Locally or Globally? (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finchp:2-16

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