The International CAPM Redux
74 Pages Posted: 9 Nov 2014 Last revised: 18 Feb 2017
Date Written: July 1, 2015
We provide evidence that international equity investors are compensated for bearing currency risk. Three factors --- a global equity factor denominated in local currencies, and two currency factors, dollar and carry --- account for a wide cross-section of equity returns from 46 developed and emerging countries from 1976 to the present. They are also useful at explaining the risks of international mutual funds and hedge funds. A simple complete-markets model replicates our empirical findings. The model implies a novel perspective on optimal currency hedging.
Keywords: Equity, Exchange rates, Risk
JEL Classification: F31, G12
Suggested Citation: Suggested Citation