Equity risk premia and the pricing of foreign exchange risk

Robert A. Korajczyk; Claude J. Viallet

doi:10.1016/0022-1996(92)90001-Z

Equity risk premia and the pricing of foreign exchange risk

Robert A. Korajczyk^*, Claude J. Viallet

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

33 Scopus citations

Abstract

We investigate the relation between the risk premia observed in forward foreign exchange markets and international equity markets using the Arbitrage Pricing Theory. If returns on well- diversified equity portfolios explain movements in agents' intertemporal marginal rate of substitution, then the time variation in forward risk premia should be explained by the forward contract's sensitivity to the equity portfolios and the time variation in the risk premia of those portfolios. We find that equity and forward risk premia are related, but that forward contracts have a component of their conditional mean returns unexplained by their relation to equity factors.

Original language	English (US)
Pages (from-to)	199-219
Number of pages	21
Journal	Journal of International Economics
Volume	33
Issue number	3-4
DOIs	https://doi.org/10.1016/0022-1996(92)90001-Z
State	Published - Nov 1992

Funding

Corremondence to: R.A. Koraiczvk, Kellogg Graduate School of Management, University, 2001 Sheridan Road,-Eianston, 1~60208-2006, USA. *We wish to thank David Backus. Tim Bollerslev, Wayne Ferson, Karen Lewis, the referees and editors, and seminar participants at Northwestern University, Stanford University, University of Southern California, and the NBER Workshop on International Macro and Finance. This research was completed thanks to the financial support of INSEAD.

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/0022-1996(92)90001-Z

Cite this

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title = "Equity risk premia and the pricing of foreign exchange risk",

abstract = "We investigate the relation between the risk premia observed in forward foreign exchange markets and international equity markets using the Arbitrage Pricing Theory. If returns on well- diversified equity portfolios explain movements in agents' intertemporal marginal rate of substitution, then the time variation in forward risk premia should be explained by the forward contract's sensitivity to the equity portfolios and the time variation in the risk premia of those portfolios. We find that equity and forward risk premia are related, but that forward contracts have a component of their conditional mean returns unexplained by their relation to equity factors.",

author = "Korajczyk, \{Robert A.\} and Viallet, \{Claude J.\}",

note = "Funding Information: Corremondence to: R.A. Koraiczvk, Kellogg Graduate School of Management, University, 2001 Sheridan Road,-Eianston, 1\textasciitilde{}60208-2006, USA. *We wish to thank David Backus. Tim Bollerslev, Wayne Ferson, Karen Lewis, the referees and editors, and seminar participants at Northwestern University, Stanford University, University of Southern California, and the NBER Workshop on International Macro and Finance. This research was completed thanks to the financial support of INSEAD.",

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doi = "10.1016/0022-1996(92)90001-Z",

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AB - We investigate the relation between the risk premia observed in forward foreign exchange markets and international equity markets using the Arbitrage Pricing Theory. If returns on well- diversified equity portfolios explain movements in agents' intertemporal marginal rate of substitution, then the time variation in forward risk premia should be explained by the forward contract's sensitivity to the equity portfolios and the time variation in the risk premia of those portfolios. We find that equity and forward risk premia are related, but that forward contracts have a component of their conditional mean returns unexplained by their relation to equity factors.

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Equity risk premia and the pricing of foreign exchange risk

Abstract

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ASJC Scopus subject areas

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