Equity risk premia and the pricing of foreign exchange risk

Robert A. Korajczyk*, Claude J. Viallet

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

31 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 languageEnglish (US)
Pages (from-to)199-219
Number of pages21
JournalJournal of International Economics
Volume33
Issue number3-4
DOIs
StatePublished - Nov 1992

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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