An Evaluation of International Asset Pricing Models

41 Pages Posted: 31 Jan 2002

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Torbjorn Sallstrom

Stockholm School of Economics - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

This Paper assesses the ability of international asset pricing models to explain the cross-sectional variation in expected returns. All the models considered seem to capture national market returns fairly well. Global portfolios sorted on earnings-price ratio and market value, however, pose a special challenge. We find that an unconditional international CAPM cannot explain the cross-sectional variation in these portfolio returns. Interestingly, a conditional international asset-pricing model that includes foreign exchange risk factors is able to explain a large part of the variation in average returns. Our empirical work suggests that this model has the same explanatory ability as an international three-factor model, where zero-cost portfolios based on earnings-price ratios and market values are used in addition to the world market portfolio. Importantly, the loadings associated with the zero-cost portfolios are driven out by the characteristics themselves, indicating a misspecification.

Keywords: Characteristics, conditional information, foreign exchange risk, HML, SMB, world CAPM

JEL Classification: F31, G12, G15

Suggested Citation

Dahlquist, Magnus and Sallstrom, Torbjorn, An Evaluation of International Asset Pricing Models (January 2002). Available at SSRN: https://ssrn.com/abstract=298447

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Torbjorn Sallstrom

Stockholm School of Economics - Department of Finance ( email )

Box 6501
SE-113 83 Stockholm
Sweden
+46 8 736 9153 (Phone)
+46 8 313 327 (Fax)

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