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Application of Intertemporal CAPM on International Corporate Finance

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

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  • Jow-Ran Chang
  • Mao-Wei Hung
  • Cheng Few Lee

Abstract

This chapter discusses both intertemporal asset pricing model and international asset pricing model (IAPM) in detail. In intertemporal asset pricing model we discuss Campbell (1993) model which assumes that investors are assumed to be endowed with Kreps–Porteus utility and consumption is substituted out from the model. In addition, it extends Campbell’s (1993) model to develop an intertemporal IAPM. We show that the expected international asset return is determined by a weighted average of market risk, market hedging risk, exchange rate risk and exchange rate hedging risk. A test of the conditional version of our intertemporal IAPM using a multivariate GARCH process supports the asset pricing model. We find that the exchange rate risk is important for pricing international equity returns and it is much more important than intertemporal hedging risk.

Suggested Citation

  • Jow-Ran Chang & Mao-Wei Hung & Cheng Few Lee, 2020. "Application of Intertemporal CAPM on International Corporate Finance," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 12, pages 485-517, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0012
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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