 The International CAPM When Expected Returns Are Time-VaryingDavid Ng () No 127283, Working Papers from Cornell University, Department of Applied Economics and Management Abstract: This paper derives a dynamic version of the international CAPM. The exchange-rate risk factors and intertemporal hedging factors are derived endogenously in a model that builds upon Campbell (1993). We provide a theoretical foundation for empirical risk factors often used in international asset pricing, including dividend yields, forward premia and, especially, exchange-rate indices. The model nests the standard CAPM, the international CAPM and the dynamic CAPM. Empirically, the model performs quite well in explaining average foreign-exchange and stock market returns in the US, Japan, Germany and the UK, and exchange-risk and intertemporal hedging factors play some role in pricing these assets. However, while derived in a theoretically sound fashion, these new factors are proportional to covariances with the world market portfolio. Hence, for practical purpose, the model does not perform better than the standard CAPM model. We apply the model to explain returns on portfolios of high book-to-market stocks across countries, and ̄nd that the exchange rate and intertemporal hedging factors do not help to predict these returns. Hence, they cannot account for the two-factor model proposed in Fama and French (1998). Keywords: Risk; and; Uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ags:cudawp:127283 Access Statistics for this paper More papers in Working Papers from Cornell University, Department of Applied Economics and Management Contact information at EDIRC. |
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