Essays in international asset pricing and foreign exchange risk.

摘要

The purpose of this thesis is to provide new evidence on the pricing of foreign exchange risk in the stock market by testing international asset pricing models (IAPMs) under varying market structures and different exchange rate measures. It is composed of three essays. In the first essay, I test unconditional asset pricing models with exchange risk using country, portfolio and firm level data from nine emerging markets (EMs). It is shown that unlike the case for developed markets where unconditional tests often fail to detect a significant exchange risk premium in stock returns, exchange risk is unconditionally priced in EMs. However, when local market risk is introduced in the model to take into account potential segmentation effects, exchange risk premia are totally subsumed by local risk premia for most countries especially at the firm level. The second essay examines the significance of exchange risk in conditional IAPMs using multivariate GARCH-in-Mean specification and time varying prices of risk. The model tested assumes partial integration and uses real exchange rates to account for both inflation risk and nominal exchange risk. The main empirical results support the hypothesis of significant exchange risk premia in EMs equity returns even after accounting for local market risk. The exchange risk premia are also economically significant as they represent on average 18 percent of total premium, and may reach up to 45 percent of total premium for some countries over sub-periods. In the third essay, I test for the pricing of exchange risk in stock returns using globally diversified sector portfolios. The purpose of this test is to examine the effect of cross-currency diversification on the global price of foreign exchange risk. Since there is no previous evidence on this issue, I use data on the G7 countries and EMs. The results suggest that the effects of exchange risk may be less significant in pricing global assets such as global sector portfolios that are diversified across both developed and emerging markets. Further investigation of this issue is called for. The conclusions of this thesis have important implications for international asset pricing modeling and testing, as well as for hedging policies of corporate managers and portfolio investors.