Time-Varying Risk Premia in Foreign Exchange and Equity Markets: Evidence From Asia–Pacific Countries

Posted: 28 Feb 2021

See all articles by Chu-Sheng Tai

Chu-Sheng Tai

Texas Southern University - Department of Accounting and Finance

Date Written: 1999

Abstract

This paper examines the validity of the risk premia hypothesis in explaining deviations from Uncovered Interest Parity (UIP) and the role of deviations from Purchasing Power Parity (PPP) in the pricing of foreign exchange rates and equity securities in five Asia–Pacific countries and the US. Using weekly data from 1 January, 1988 to 27 February, 1998, I find that conditional variances are not related to the deviations from UIP in any statistical sense based on an univariate GARCH(1,1)-M model. As I consider both foreign exchange and equity markets together and test a conditional international CAPM (ICAPM) in the absence of PPP, I cannot reject the model based on the J-test by Hansen (Econometrica 50 (1982), 1029–1054) and find significant time-varying foreign exchange risk premia present in the data. This empirical evidence supports the notion of time-varying risk premia in explaining the deviations from UIP. It also supports the idea that the foreign exchange risk is not diversifiable and hence should be priced in both markets. © 1999 Elsevier Science B.V. All rights reserved.

Keywords: International asset pricing; Uncovered interest parity; Foreign exchange risk premium

JEL Classification: F31; G12; C32

Suggested Citation

Tai, Chu-Sheng, Time-Varying Risk Premia in Foreign Exchange and Equity Markets: Evidence From Asia–Pacific Countries (1999). Journal of Multinational Financial Management, Vol. 9, No. 3-4, Pages 291-316, 1999, Available at SSRN: https://ssrn.com/abstract=3758635

Chu-Sheng Tai (Contact Author)

Texas Southern University - Department of Accounting and Finance ( email )

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
89
PlumX Metrics