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The International CAPM Redux

74 Pages Posted: 9 Nov 2014 Last revised: 18 Feb 2017

Francesca Brusa

Temple University - Fox School of Business

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Adrien Verdelhan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 1, 2015

Abstract

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

Brusa, Francesca and Ramadorai, Tarun and Verdelhan, Adrien, The International CAPM Redux (July 1, 2015). Saïd Business School WP 2014-11. Available at SSRN: https://ssrn.com/abstract=2520475 or http://dx.doi.org/10.2139/ssrn.2520475

Francesca Brusa

Temple University - Fox School of Business ( email )

1801 Liacouras Walk
Alter Hall #426
Philadelphia, PA Pennsylvania 19122
United States
+12152046477 (Phone)

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Adrien Verdelhan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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