Are Financial Assets Priced Locally or Globally? / G. Andrew Karolyi, Rene M. Stulz.

Format:

Book

Author/Creator:

Karolyi, G. Andrew.

Contributor:

National Bureau of Economic Research.

Stulz, Rene M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8994.

NBER working paper series no. w8994

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset pricing models with mean-variance investors predict that an asset's risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country's risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase global influences on asset prices.

Notes:

Print version record

June 2002.