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Title: |
Risk and International Parity Conditions: A Synthesis from
Consumption-Based Models |
| Author: |
Chiang, Thomas
C.; Trinidad, Jose A. |
| Author
Affiliation: |
Drexel U;
Southwest TX State U |
| Source: |
International Economic Journal, Summer 1997, v. 11, no. 2, pp. 73-101 |
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Publication Date: |
Summer 1997 |
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Abstract: |
Built on a consumption-based capital asset
pricing model, this paper presents a coherent theoretical framework from
which the main international parity conditions are derived. These
conditions represent market equilibria characterized by the equality of
gross returns after adjustment for risk premia. The spectrum of assets
treated is broadened to include equity markets. The parity conditions
obtained from the model are then used to characterize the relationships
for the pricing of risks encountered in international finance. Only two
fundamental types of aggregate risk matter when pricing any asset:
equity risk and foreign exchange rate risk. The relative riskiness of an
asset can then be approximately measured by a linear combination of
equity and foreign exchange risk premia. |
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