The World Price of Foreign Exchange Risk

Dumas, Bernard; Solnik, Bruno

doi:10.3386/w4459

Cited by 189 publications

(281 citation statements)

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“…Adler and Dumas (1983) present a model in which the world market portfolio and exchange risks are the relevant risk factors. The exchange risks can be broken down into a separate factor for each currency, as in Dumas and Solnik (1995), or can be approximated by a single variable, as in Harvey (1993, 1994a). We use the G10 FX return, which is the US dollar return to holding a portfolio of the currencies of the G10 countries (plus Switzerland) in excess of the 30-day Eurodollar deposit rate.…”

Section: Country Credit Ratingsmentioning

confidence: 99%

Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

Ferson

Harvey

1996

SSRN Journal

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This paper provides a global asset pricing perspective on the debate over the relation between predetermined attributes of common stocks, such as ratios of price-to-bookvalue, cash-¯ow, earnings, and other variables to the future returns. Some argue that such variables may be used to ®nd securities that are systematically undervalued by the market, while others argue that the measures are proxies for exposure to underlying economic risk factors. It is not possible to distinguish between these views without explicitly modelling the relation between such attributes and risk factors. We present an empirical framework for attacking the problem at a global level, assuming integrated markets. Our perspective pulls together the traditional academic and practitioner viewpoints on lagged attributes. We present new evidence on the relative importance of risk and mispricing e ects, using monthly data for 21 national equity markets. We ®nd that the cross-sectional explanatory power of the lagged attributes is related to both risk and mispricing in the two-factor model, but the risk e ects explain more of the variance than mispricing. Ó 1998 Elsevier Science B.V. All rights reserved. 0378-4266/97/$17.00 Ó 1997 Elsevier Science B.V. All rights reserved. PII S 0 3 7 8 -4 2 6 6 ( 9 7 ) 0 0 0 4 4 -7

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Section: Country Credit Ratingsmentioning

confidence: 99%

Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

Ferson

Harvey

1996

SSRN Journal

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“…International asset pricing models recognize these effects by including exchange rate risk as a systematic risk factor (e.g. Solnik, 1974;Stulz, 1981;Adler and Dumas, 1983) and can, thus, be used to empirically investigate the issue of financial market integration (Dumas and Solnik, 1995). In the same vein, the effect of the Economic and Monetary Union (EMU) on European stock market integration can be examined with a weighted average asset pricing model that includes the covariance between stock returns and exchange rate returns, suggesting that the forward interest differential between a country and Germany has played an important role for the degree of integration (Hardouvelis et al, 2001).…”

Section: Integration and Dependence Of European Financial Marketsmentioning

confidence: 99%

The Euro and European financial market dependence

Bartram

Taylor

Wang

2007

Journal of Banking & Finance

204

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A time-varying copula model is used to investigate the impact of the introduction of the Euro on the dependence between seventeen European stock markets during the period 1994-2003. The model is implemented with a GJR-GARCH-MA-t model for the marginal distributions and the Gaussian copula for the joint distribution, which allows capturing time-varying, non-linear relationships. The results show that, within the Euro area, market dependence increased after the introduction of the common currency only for large equity markets, such as in France, Germany, Italy, the Netherlands and Spain. Structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when Euro membership was determined and the relevant information was announced. The UK and Sweden, but not other European countries outside the Euro area, are found to exhibit an increase in equity market co-movement, which is consistent with the interpretation that these countries may be expected to join the Euro in the future. The Euro and European Financial Market Dependence AbstractA time-varying copula model is used to investigate the impact of the introduction of the Euro on the dependence between seventeen European stock markets during the period 1994-2003. The model is implemented with a GJR-GARCH-MA-t model for the marginal distributions and the Gaussian copula for the joint distribution, which allows capturing time-varying, non-linear relationships. The results show that, within the Euro area, market dependence increased after the introduction of the common currency only for large equity markets, such as in France, Germany, Italy, the Netherlands and Spain. Structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when Euro membership was determined and the relevant information was announced. The UK and Sweden, but not other European countries outside the Euro area, are found to exhibit an increase in equity market co-movement, which is consistent with the interpretation that these countries may be expected to join the Euro in the future.

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“…And third, there is evidence that exchange rate uncertainty can have a large effect on financial integration because exchange rate risk is an important source of risk priced on capital markets (e.g. Dumas and Solnik 1995, Bodart and Reding 1999, Hardouvelis et al 1999.…”

Section: Introductionmentioning

confidence: 99%

Financial market integration in Europe: on the effects of EMU on stock markets

2002

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in E U R O P E A N C E N T R A L B A N K W O R K I N G PA P E R S E R I E S AbstractThis paper analyzes the integration process of European equity markets since the 1980s. Its central focus is on the role that EMU, and specifically, changes in exchange rate volatility, has played in this process of financial integration. Building on an uncovered interest rate parity condition to measure financial integration, a trivariate GARCH model with time-varying coefficients yields three key results: first, European equity markets have become highly integrated only since 1996. Second, the Euro area market has gained considerably in importance in world financial markets and has taken over from the US as the dominant market in Europe.And third, the integration of European equity markets is in large part explained by the drive towards EMU, and in particular the elimination of exchange rate volatility and uncertainty in the process of monetary unification.JEL classification: C32, F3, G15

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The World Price of Foreign Exchange Risk

Cited by 189 publications

References 0 publications

Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

The Euro and European financial market dependence

Financial market integration in Europe: on the effects of EMU on stock markets

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