The World Price of Foreign Exchange Risk

Posted: 3 May 2000

See all articles by Bernard Dumas

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Bruno Solnik

Hong Kong University of Science & Technology (HKUST) - Department of Finance ; HEC Paris - Departement Finance et Economie

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Abstract

Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This paper investigates whether exchange rate risks are priced in international asset markets using a conditional approach which allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world s four largest equity markets support the existence of foreign exchange risk premia.

JEL Classification: G11, G12, G15

Suggested Citation

Dumas, Bernard and Solnik, Bruno, The World Price of Foreign Exchange Risk. Available at SSRN: https://ssrn.com/abstract=6115

Bernard Dumas

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Bruno Solnik (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

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Hong Kong

HEC Paris - Departement Finance et Economie ( email )

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France
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+33 1 39 67 70 85 (Fax)

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