TWO ESSAYS ON INTERNATIONAL ASSET PRICING

Abstract

The Sharpe (1964) and Lintner (1965} two-moment asset pricing model is the most widely used asset-pricing model in Modern Finance. This model has been subjected to numerous applications and, in the field of international finance, has been extended and modified for research on international asset pricing. Two major streams of research in international asset pricing are (i) multiple factor CAPM, and (ii) three-moment CAPM. This thesis, comprising two essays, addresses issues in these two areas of research. The first essay which empirically examines a multiple factor CAPM is an extension of Ferson and Harvey's (1995) work on multiple factor asset pricing. While their study concerns only the impact of global information on assets returns, our study includes both global and local information variables in the multiple factor CAPM. This way, we can segregate the impact of different categories of information on the behavior of returns. In addition, we study two categories of equity markets: the developed equity markets of the G7 countries plus the Netherlands, and the emerging equity markets of the East Asian countries. This study covers the period from January 1982 to December 1996. The results indicate that the developed markets of the G7 countries plus the Netherlands are more affected by changes in global information variables than are the emerging markets of the East Asian countries. The exceptions to the latter group are Hong Kong and Singapore. These two countries bear more similarities to the developed markets. We also find that equity markets are not as integrated as one would expect them to be. We further estimate the risk premium associated with the global and local risk factor and find a positive premium for the local risk factor (local exchange rate change). The risk premium for the global risk factor (global market return), and for the local risk factor (local market return), is generally positive, with negative premia for some of the countries. We cannot reject the multiple factor models using the generalized method of moments test The second essay empirically estimates two different three-moment CAPM. We first employ Nummelin (1997) methodology to estimate the global three-moment CAPM. We then modify the methodology to allow us to use the nominal returns instead of excess returns in estimating the country three-moment CAPM. We estimate both the conditional and unconditional models. This study covers the same period (from January 1982 to December 1996). Our research shows that we cannot reject the global and country three-moment CAPM. We find that the prices of covariance and co-skewness of the global model are generally positive and significantly different from zero. However, we find that the prices of co-skewness tend to be small and though significantly different from zero, may not be economically significant. We also find that the prices of covariance and co-skewness for the country model are generally positive but its magnitude is small; these prices may not be economically significant. Both the conditional and unconditional models yield similar results. Also, we cannot detect any systematic difference between the developed markets and the emerging markets.