Exchange Rates and the Conversion of Currency-Specific Risk Premia

55 Pages Posted: 19 Aug 2004

See all articles by Astrid Eisenberg

Astrid Eisenberg

Mercer Oliver Wyman

Markus Rudolf

WHU Otto Beisheim Graduate School of Management

Date Written: July 2004

Abstract

How do the risk factors that drive asset prices influence exchange rates? Are the parameters of asset price processes relevant for specifying exchange rate processes? Since most international asset pricing models focus on the analysis of asset returns given exchange rate processes, there is only little work on these questions. This paper uses an international stochastic discount factor (SDF) framework to analyze the interplay between asset prices and exchange rates. So far, this approach has only been implemented in international term structure models. We find that exchange rates serve to convert currency-specific discount factors and currency-specific prices of risk - a result linked to the international arbitrage pricing theory (IAPT). Our empirical investigation presents evidence for the conversion of currency-specific risk premia by exchange rates.

Keywords: Stochastic discount factor, pricing kernel, international

JEL Classification: F21, F31, G12, G15

Suggested Citation

Eisenberg, Astrid and Rudolf, Markus, Exchange Rates and the Conversion of Currency-Specific Risk Premia (July 2004). Available at SSRN: https://ssrn.com/abstract=578442 or http://dx.doi.org/10.2139/ssrn.578442

Astrid Eisenberg (Contact Author)

Mercer Oliver Wyman ( email )

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Markus Rudolf

WHU Otto Beisheim Graduate School of Management ( email )

Burgplatz 2
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Germany
+49-(0)261-6509-420 (Phone)

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