International Asset Excess Returns and Multivariate Conditional Volatilities

Author: Chiang Thomas   Yang Sheng-Yung  

Publisher: Springer Publishing Company

ISSN: 0924-865X

Source: Review of Quantitative Finance and Accounting, Vol.24, Iss.3, 2005-05, pp. : 295-312

Disclaimer: Any content in publications that violate the sovereignty, the constitution or regulations of the PRC is not accepted or approved by CNPIEC.

Previous Menu Next

Abstract

This paper constructs a multivariate model in relating multi-asset excess returns to their conditional variances. Applying weekly data to investigate the foreign-exchange risk premium, the evidence from a multivariate GARCH model shows that the foreign-exchange excess returns are significantly correlated with economic fundamentals such as the real interest-rate differential, long-short interest-rate spread differential, and equity-premium differential. The evidence also suggests that foreign-exchange excess returns are not independent of the conditional variances of these fundamental variables, supporting the time-varying risk-premium hypothesis.