The Cost of Capital in International Financial Markets: Local or Global?

37 Pages Posted: 20 Jul 1999 Last revised: 12 May 2010

See all articles by Kees C. G. Koedijk

Kees C. G. Koedijk

Tilburg University - Department of Finance

Clemens J.M. Kool

Utrecht University - School of Economics

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Peter C. Schotman

Maastricht University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 1999

Abstract

In this paper we empirically investigate to what extent three competing asset pricing models price an individual firm's stock differently in an internationally integrated world: (i) the multifactor ICAPM of Solnik-Sercu including both the global market portfolio and exchange rate risk premiums, (ii) the single factor ICAPM with only the global market portfolio, and (iii) the single factor domestic CAPM. We generalize the pricing error expressions of Stulz (1995b) for the domestic CAPM against the single factor ICAPM to the multifactor model with exchange rate factors included. Furthermore, we derive formal statistical tests for the existence of a pricing error of the domestic CAPM versus both the single factor ICAPM and the multifactor ICAPM. We test for the significance of these pricing errors in a sample of 2,483 firms from 10 industrialized countries using monthly data from 1980 to 1995. We find that the single factor ICAPM without exchange rate factors induces mispricing for more than 60% of all firms. The domestic CAPM leads to a substantial and statistically significant pricing error for approximately 7% of all firms.

JEL Classification: G12

Suggested Citation

Koedijk, Kees G. and Kool, Clemens J.M. and Van Dijk, Mathijs A. and Schotman, Peter C., The Cost of Capital in International Financial Markets: Local or Global? (May 1, 1999). Journal of International Money and Finance, Vol. 21, pp. 905–929, 2002. Available at SSRN: https://ssrn.com/abstract=166848 or http://dx.doi.org/10.2139/ssrn.166848

Kees G. Koedijk (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Clemens J.M. Kool

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

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