The World Price of Inflation Risk

39 Pages Posted: 5 Apr 2005

See all articles by G. A. Moerman

G. A. Moerman

AEGON Asset Management; Erasmus University Rotterdam (EUR) - Department of Financial Management

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

Abstract

We show that inflation risk is priced in international asset returns. We analyze the price of inflation risk in a framework that includes the International Capital Asset Pricing Model (ICAPM) as a special case. In contrast to the literature, we relax the assumption that inflation rates are constant. We estimate and test a conditional version of the model for the G5 countries (France, Germany, Japan, the U.K., and the U.S.) over the period 1975-2003. We find evidence of statistically significant prices of inflation risk (in addition to priced nominal exchange rate risk). We demonstrate that inflation risk premia are an economically important component of international asset returns. Our results can be interpreted as a rejection of the ICAPM. Moreover, we show that even after the termination of nominal exchange rate fluctuations in the euro area after 1999, differences in inflation rates across countries entail non-trivial real exchange rate risk premia.

Keywords: International asset pricing, Inflation risk, Exchange rate risk

JEL Classification: C32, F30, G12

Suggested Citation

Moerman, Gerard A. and Van Dijk, Mathijs A., The World Price of Inflation Risk (February 2005). Available at SSRN: https://ssrn.com/abstract=675911 or http://dx.doi.org/10.2139/ssrn.675911

Gerard A. Moerman

AEGON Asset Management ( email )

P.O. Box 202
2501 CE The Hague
Netherlands
+31 70 344 8318 (Phone)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

Mathijs A. Van Dijk (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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