Working Paper: NBER ID: w4074
Authors: KC Chan; G. Andrew Karolyi; Ren M. Stulz
Abstract: We document that there is a significant foreign influence on the risk premium of U.S. assets. Using a bivariate GARCH-in-mean process for conditional expected excess returns, we find that the conditional expected excess return on U.S. stocks is positively related to the conditional covariance of the return of these stocks with the return on a foreign index but is not related to its own conditional variance. Further, we are unable to reject the international version of the CAPM. Evidence is presented for different model specifications, multiple-day returns and alternative proxies of foreign stock returns including the Nikkei 225 Stock Average, Morgan Stanley Japan and Morgan Stanley EAFE indices.
Keywords: risk premium; US equity; foreign influence; CAPM; international asset pricing
JEL Codes: G12; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| conditional covariance with foreign market indices (G15) | expected excess return on US stocks (G17) |
| conditional variance of US stocks (C46) | expected excess return on US stocks (G17) |
| conditional covariance with foreign market indices (G15) | risk premium on US assets (G12) |
| international version of CAPM (G15) | risk premium on US assets (G12) |