Inflation Risk and International Asset Returns

GA Moerman, Mathijs van Dijk

Research output: Contribution to journalArticleAcademicpeer-review

19 Citations (Scopus)

Abstract

We show that inflation risk is priced in international asset returns. We analyze inflation risk in a framework that encompasses the International Capital Asset Pricing Model (ICAPM) of Adler and Dumas (1983). In contrast to the extant empirical literature on the ICAPM, we relax the assumption that inflation rates are constant. We estimate and test a conditional version of the model for the G5 countries (France, Germany, Japan, the UK, and the US) over the period 1975¿1998 and find evidence of statistically and economically significant prices of inflation risk (in addition to priced nominal exchange rate risk). Our results imply a rejection of the restrictions imposed by the ICAPM. In an extension of our analysis to 2003, we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999, differences in inflation rates across countries entail non-trivial real exchange rate risk premia.
Original languageUndefined/Unknown
Pages (from-to)840-855
Number of pages16
JournalJournal of Banking and Finance
Volume34
Issue number4
DOIs
Publication statusPublished - 2010

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