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Assessing Euro Crises from a Time Varying International CAPM Approach

Richard T. Baillie () and Dooyeon Cho
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Richard T. Baillie: Department of Economics, Michigan State University, USA; School of Economics and Finance, Queen Mary University of London, UK; The Rimini Centre for Economic Analysis, Italy

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper initially reviews the current empirical literature on the Euro exchange rate. We consider the relationship between the euro and other floating currencies in terms of excess returns on bond markets and also the relationship between the euro-dollar and the US and European equity markets. One novelty in the paper is to consider the variation in the euro-dollar rate from an international capital asset pricing model (CAPM) perspective. The second new innovation is to use a kernel weighted time varying parameter regression approach which allows structural parameters and risk premium terms to evolve over time. We find evidence that the euro-dollar rate is substantially influenced by equity markets in the US and in the Eurozone.

Date: 2016-02
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