Is Exchange Risk Priced Beyond Intertemporal Risk?
33 Pages Posted: 13 Oct 2005
Date Written: March 2005
Recent conditional tests show that exchange risk is priced in integrated international markets. However, these results are typically obtained assuming that intertemporal risk does not matter. We test an intertemporal international asset-pricing model where the investment opportunity set is dynamic. Using a conditional orthogonalization approach, we investigate whether the exchange risk is priced once the market and intertemporal risks are fully taken into account. We find that, in addition to the market and intertemporal risks, the exchange risk is an important determinant of risk premium. We also find that the intertemporal risk, which is often overlooked in the literature, is priced.
Keywords: International asset pricing models, exchange risk, intertemporal risk
JEL Classification: G15
Suggested Citation: Suggested Citation