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Equity Risk Premia and the Pricing of Foreign Exchange Risk

34 Pages Posted: 13 Oct 2011  

Date Written: November 1991


We investigate the relation between the risk premia observed in forward foreign exchange markets and international equity markets using the Arbitrage Pricing Theory. If returns on well-diversified equity portfolios explain movements in agents' intertemporal marginal rate of substitution then the time variation in forward risk premia should be explained by the forward contract's sensitivity to the equity portfolios and the time variation in the risk premia of those portfolios. We find that equity and forward risk premia are related, but that forward contracts have a component of their conditional mean returns unexplained by their relation to equity factors.

Keywords: Foreign exchange, uncovered interest parity, carry trade, forward market, Arbitrage Pricing Theory, APT, Asset Pricing Model

JEL Classification: F3, F31, G1, G12, G15

Suggested Citation

Korajczyk, Robert A. and Viallet, Claude, Equity Risk Premia and the Pricing of Foreign Exchange Risk (November 1991). Journal of International Economics, Vol. 33, Nos. 3-4, 1992. Available at SSRN:

Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)


Claude Viallet

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex

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