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Tests of CAPM on an International Portfolio of Bonds and Stocks

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  • Charles Engel

Abstract

This paper estimates and tests an international version of the Capital Asset Pricing Model. Investors from the U.S., Germany and Japan choose a portfolio that includes bonds and equities from each of these countries to maximize a function of the mean and variance of returns. Investors in each country evaluate returns in terms of their home currency. The CAPM does have some power in explaining ex ante returns. It predicts fairly large risk premia on the equities, but small ones on bonds. The model is rejected, however, when tested against a more general alternative that allows for more investor heterogeneity than the CAPM.

Suggested Citation

  • Charles Engel, 1993. "Tests of CAPM on an International Portfolio of Bonds and Stocks," NBER Working Papers 4598, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4598
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    Cited by:

    1. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Books, National Bureau of Economic Research, Inc, number fran94-1.
    2. Iwaisako, Tokuo, 2002. "Does International Diversification Really Diversify Risks?," Journal of the Japanese and International Economies, Elsevier, vol. 16(1), pages 109-134, March.
    3. Lahrech, Abdelmounaim & Sylwester, Kevin, 2013. "The impact of NAFTA on North American stock market linkages," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 94-108.
    4. Stuart Landon & Constance E. Smith, 2003. "The Risk Premium, Exchange Rate Expectations, and the Forward Exchange Rate: Estimates for the Yen–Dollar Rate," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 144-158, February.
    5. Karen K. Lewis, 1998. "International Home Bias in International Finance and Business Cycles," NBER Working Papers 6351, National Bureau of Economic Research, Inc.
    6. Cavusoglu, Nevin & Goldberg, Michael D. & Stillwagon, Josh, 2021. "Currency returns and downside risk: Debt, volatility, and the gap from benchmark values," Journal of Macroeconomics, Elsevier, vol. 68(C).
    7. Mesly, Olivier & Chkir, Imed & Racicot, François-Éric, 2019. "Predatory cells and puzzling financial crises: Are toxic products good for the financial markets?," Economic Modelling, Elsevier, vol. 78(C), pages 11-31.
    8. Lewis, Karen K., 1995. "Puzzles in international financial markets," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 37, pages 1913-1971, Elsevier.
    9. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    10. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    11. Kim, Inbae & Salemi, Michael K., 2000. "Estimation and simulation of risk premia in equity and foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 561-582, August.
    12. Richards, Anthony J., 1995. "Comovements in national stock market returns: Evidence of predictability, but not cointegration," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 631-654, December.
    13. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
    14. Nevin Cavusoglu & Michael D. Goldberg & Joshua Stillwagon, 2019. "New Evidence on the Portfolio Balance Approach to Currency Returns," Working Papers Series 89, Institute for New Economic Thinking.
    15. Tesar, Linda L., 1995. "Evaluating the gains from international risksharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 95-143, June.

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    • F3 - International Economics - - International Finance

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