International Asset Pricing Models and Currency Risk: Evidence from Finland 1970-2004
Posted: 1 May 2005
Abstract
In this paper we investigate whether global, local and currency risks are priced in the Finnish stock market using conditional international asset pricing models. We take the view of a US investor. The estimation is conducted using a modified version of the multivariate GARCH framework of De Santis and Gérard (1998). For a sample period from 1970 to 2004, we find the world risk to be time-varying. While local risk is not priced for the USA, the local component is significant and time-varying for Finland. Currency risk is priced in the Finnish market, but is not time-varying using the De Santis and Gérard specification. This suggests that the linear specification for the currency risk may not be adequate for non-free floating currencies.
Keywords: World asset pricing model, conditional, time-varying, price of market risk, local vs. global pricing, segmentation, foreign exchange risk, multivariate GARCH-M, Finland, USA, U.S. dollar
JEL Classification: F1, G1
Suggested Citation: Suggested Citation