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The price of inflation and foreign exchange risk in international equity markets

Author

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  • Cesare Robotti

Abstract

In this paper the author formulates and tests an international intertemporal capital asset pricing model in the presence of deviations from purchasing power parity (II-CAPM [PPP]). He finds evidence in favor of at least mild segmentation of international equity markets in which only global market risk appears to be priced. When using the Hansen & Jagannathan (1991, 1997) variance bounds and distance measures as testing devices, the author finds that, while all international asset pricing models are formally rejected by the data, their pricing implications are substantially different. The superior performance of the II-CAPM (PPP) is mainly attributable to significant hedging against inflation risk.

Suggested Citation

  • Cesare Robotti, 2001. "The price of inflation and foreign exchange risk in international equity markets," FRB Atlanta Working Paper 2001-26, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2001-26
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    References listed on IDEAS

    as
    1. Pierluigi Balduzzi & Cesare Robotti, 2001. "Minimum-variance kernels, economic risk premia, and tests of multi-beta models," FRB Atlanta Working Paper 2001-24, Federal Reserve Bank of Atlanta.
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    Cited by:

    1. Cesare Robotti, 2003. "Dynamic strategies, asset pricing models, and the out-of-sample performance of the tangency portfolio," FRB Atlanta Working Paper 2003-6, Federal Reserve Bank of Atlanta.
    2. Akbari, Amir & Carrieri, Francesca, 2023. "Global risk and market conditions," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 51-70.

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    Keywords

    Hedging (Finance); Asset pricing; Foreign exchange; Risk;
    All these keywords.

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