Do Exchange Rates Convert Prices of Risk Across Countries?

Hans Dewachter, Kristien Smedts () and Konstantijn Maes ()
Additional contact information
Kristien Smedts: K.U.Leuven, C.E.S., International Economics

International Economics Working Papers Series from Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics

Abstract: Absence of arbitrage conditions impose important restrictions on the dynamics of bond and exchange rate returns. It can be shown that the exchange rate serves to convert prices of international undiversifiable risks from one currency to another. Put differently, arbitrage ensures that risk carries the same price in any two countries when evaluated from a particular viewpoint. As a consequence of this, expected returns should be equal after being converted to a common currency. We develop, estimate and test a linear 3-country asset pricing model for exchange risk hedged bond returns. Using US, UK, and German bond portfolio return data we find favorable evidence for the exchange rate being an unconditional converter of prices of risk across countries. Few other papers verify this important arbitrage pricing corollary.

Keywords: multi-country asset pricing model; exchange risk; price of risk conversion (search for similar items in EconPapers)
JEL-codes: F21 G12 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2001-11
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.econ.kuleuven.ac.be/ew/academic/intecon/publications/wpie003.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.econ.kuleuven.ac.be:80 (No such host is known. )

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kul:kulwps:wpie003

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in International Economics Working Papers Series from Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics Contact information at EDIRC.
Bibliographic data for series maintained by Jan Van Hove ( this e-mail address is bad, please contact ).