International asset returns and exchange rates

Yuming Li and Maosen Zhong

European Journal of Finance, 2009, vol. 15, issue 3, pages 263-285

Abstract: We present a consumption-based international asset-pricing model to study global equity premiums, the US riskfree rate and the cross section of international asset returns. The model entails idiosyncratic, country-specific consumption risk, which helps explain the magnitude of global equity premiums. It also features country-specific habit formation, which helps explain the level of the interest rate on the US short-term Treasury bills traded by domestic and international investors. We find that the model explains approximately 40-50% of the cross section of currency and equity premiums as well as expected returns from value and growth portfolios of at least a dozen countries. Changes in real exchange rates are responsible for explaining approximately half of the cross section of international asset returns.

Keywords: international asset pricing; consumption-based model; habit formation; idiosyncratic risks; equity premiums; currency premiums; exchange rates; inflation rates (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:taf:eurjfi:v:15:y:2009:i:3:p:263-285

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