The Price of Inflation and Foreign Exchange Risk in International Equity Markets

EFA 2002 Berlin Meetings Presented Paper; FRB of Atlanta Working Paper No. 2001-26

52 Pages Posted: 8 Dec 2001

Date Written: February 26, 2002

Abstract

In this paper the author formulates and tests an international intertemporal capital asset pricing model in the presence of deviations from purchasing power parity (II-CAPM[PPP]). He finds evidence in favor of at least mild segmentation of international equity markets in which only global market risk appears to be priced. When using the Hansen & Jagannathan (1991, 1997) variance bounds and distance measures as testing devices, the author finds that, while all international asset pricing models are formally rejected by the data, their pricing implications are substantially different. The superior performance of the II-CAPM (PPP) is mainly attributable to significant hedging against inflation risk.

Keywords: international intertemporal capital asset pricing model, purchasing power parity, hedging demands

JEL Classification: G12, G15

Suggested Citation

Robotti, Cesare, The Price of Inflation and Foreign Exchange Risk in International Equity Markets (February 26, 2002). EFA 2002 Berlin Meetings Presented Paper; FRB of Atlanta Working Paper No. 2001-26, Available at SSRN: https://ssrn.com/abstract=292612 or http://dx.doi.org/10.2139/ssrn.292612

Cesare Robotti (Contact Author)

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

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