International Asset Pricing Under Segmentation and PPP Deviations
49 Pages Posted: 16 Jun 2005
We analyze the impact of both Purchasing Power Parity (PPP) deviations and market segmentation on asset pricing and investor's portfolio holdings. The freely traded securities command a world market risk premium and an inflation risk premium. The securities that can be held by only a subset of investors command two additional premiums: a conditional market risk premium and a segflation risk premium. Our model is empirically supported with important implications for tests of international asset pricing.
Keywords: International asset pricing models, currency risk, segmentation
JEL Classification: G11, G12, G15, F31
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