The World Price of Foreign Exchange Risk

54 Pages Posted: 10 Jun 2001 Last revised: 13 Sep 2010

See all articles by Bernard Dumas

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Bruno Solnik

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: September 1993

Abstract

We consider a world capital market in which the investor population is heterogenous. Investors of different countries differ in the prices of goods at which they consume the income from their investments. In such a setting, the international CAPM incorporates rewards for exchange rate risk, in addition to the traditional reward for market-covariance risk. The aim of the paper is to determine whether these additional risk premia empirically playa significant role in the pricing of securities. The test being conducted is a test of a conditional version of the CAPM. It builds on the recent empirical literature which points out that stock market returns may, to some extent, be predicted on the basis of a number of instrumental variables, such as interest rates and dividend yields. All previous tests of the international CAPM with exchange risk premia have been tests of the unconditional version and have been inconclusive.

Suggested Citation

Dumas, Bernard and Solnik, Bruno, The World Price of Foreign Exchange Risk (September 1993). NBER Working Paper No. w4459. Available at SSRN: https://ssrn.com/abstract=227323

Bernard Dumas (Contact Author)

INSEAD ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bruno Solnik

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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