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Equity risk premia and the pricing of foreign exchange risk

Author: Viallet, Claude ; Korajczyk, RobertINSEAD Area: FinanceIn: Journal of International Economics, vol. 33, 1992 Language: EnglishDescription: p. 199-219.Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: This paper investigates the relation between the risk premia observed in forward foreign exchange markets and international equity markets. If these markets share common source of risk then the time variation in forward rsk premia should be related to the forward contract's sensitivity to well-diversified equity benchmark porfolios and the time variation in the risk premia of those benchmark portfolios. It is found that the forward contracts have a component of their conditional mean returns that is not reflected in their relation to the equity markets
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This paper investigates the relation between the risk premia observed in forward foreign exchange markets and international equity markets. If these markets share common source of risk then the time variation in forward rsk premia should be related to the forward contract's sensitivity to well-diversified equity benchmark porfolios and the time variation in the risk premia of those benchmark portfolios. It is found that the forward contracts have a component of their conditional mean returns that is not reflected in their relation to the equity markets

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