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The Impact of Exchange Rate Changes on Asset Returns in the Framework of a Consumption Based Capital Asset Pricing Model

Jaber Bahrami (), Mosayeb Pahlavani (), Reza Roshan () and Saeed Rasekhi ()
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Jaber Bahrami: Ph.D. Candidate in Economics, University of Sistan and Balochestan
Mosayeb Pahlavani: Associate Professor of Economics, University of Sistan and Balochestan
Reza Roshan: Assistant Professor of Economics, University of Persian Gulf
Saeed Rasekhi: Professor of Economics, University of Mazandaran

Quarterly Journal of Applied Theories of Economics, 2017, vol. 4, issue 1, 59-86

Abstract: Along with increasing trade between countries, the changes in exchange rate is considered as one of the most important risk factors in the financial markets. Therefore, the aim of this study was to investigate the relationship between changes in exchange rates and asset returns in the theoretical and experimental framework of consumption based capital asset pricing model (CCAPM). For this purpose, we develop a basic CCAPM model by entry imported consumer goods in the recursive utility function of Epstein and Zin. The sample consisted of eight portfolios monthly data during the period 2003 to 2015. In the first stage, we used Euler equations and the generalized moments method (GMM) of Hansen and Singleton to estimate the parameters of the model, Estimating of the parameters of Euler equations indicate that economic agents are risk-averse and patient, the elasticity of substitution between domestic consumer goods and imported consumer goods is low and the inter-temporal elasticity of substitution is high. In the second stage, using by linear Euler equations as the asset pricing model and two-pass regression method of Fama and MacBeth, we investigated the impact of exchange risk premium, inflation, market returns and domestic consumption growth on the return premium. The results show that the exchange risk premium, inflation and market returns has a positive impact on return premium, This means that economic agents to accept more risk of these variables, apply to the more reward premium will be return on assets.

Keywords: Recursive utility; Risk aversion; Elasticity of substitution; CCAPM model; GMM method (search for similar items in EconPapers)
JEL-codes: C58 D81 G11 G12 G15 (search for similar items in EconPapers)
Date: 2017
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