DP2448 Exchange Rate And Foreign Inflation Risk Premiums In Global Equity Returns

Author(s): Maria Vassalou
Publication Date: May 2000
Keyword(s): Exchange Rate Risk Premiums, Foreign Inflation Risk Premiums, International Asset Pricing
JEL(s): F30, F31, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2448

We test for the pricing of exchange rate and foreign inflation risk in equities. Our tests are motivated by the empirical implications of the models of Solnik (1974b) as revised by Sercu (1980), Grauer, Litzenberger, and Stehle (1976), and Adler and Dumas (1983). Both exchange rate and foreign inflation risk factors can explain part of the within-country cross-sectional variation in returns. Our results have important implications for hedging exchange rate risk. They also demonstrate that home bias, at least in US equity portfolios, cannot be the result of US investors' efforts to hedge their domestic inflation.