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The Impact of the Financial Crisis on the Currency Risk Premium Dynamics within the G20 :Evidence from the ICAPM

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  • Salem Boubakri

Abstract

This study tests an international extension of the Capital Asset Pricing Model (CAPM),integrating two sources of risk: the first is related to the international financial market and thesecond is related to the domestic market. Our model takes into account the financial integrationdynamics of each domestic market with the international market. In this framework, the ICAPMis tested separately, depending on whether the markets are perfectly integrated or partiallysegmented. Through an application to the different G20 stock markets, we show that thecurrency risk premium in the ICAPM is statistically and economically significant and contributesto the total risk premium. Our findings also put forward the existence of a link between highvolatility on financial markets and significant increases in risk premium, especially the onerelated to the exchange market since summer 2007.

Suggested Citation

  • Salem Boubakri, 2012. "The Impact of the Financial Crisis on the Currency Risk Premium Dynamics within the G20 :Evidence from the ICAPM," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 55(1), pages 33-73.
    • Handle: RePEc:bxr:bxrceb:2013/130021
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    More about this item

    Keywords

    Financial integration; G20; Financial crisis; ICAPM; MVGARCH;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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