Working Paper: NBER ID: w4598
Authors: Charles Engel
Abstract: This paper estimates and tests an international version of the Capital Asset Pricing Model. Investors from the U.S., Germany and Japan choose a portfolio that includes bonds and equities from each of these countries to maximize a function of the mean and variance of returns. Investors in each country evaluate returns in terms of their home currency. The CAPM does have some power in explaining ex ante returns. It predicts fairly large risk premia on the equities, but small ones on bonds. The model is rejected, however, when tested against a more general alternative that allows for more investor heterogeneity than the CAPM.
Keywords: CAPM; International Finance; Portfolio Theory
JEL Codes: G12; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CAPM (O22) | ex ante returns (G12) |
| CAPM predicts larger risk premia on equities (G12) | investors' expectations of returns (G12) |
| asset supplies and investor wealth distributions (G19) | risk premia (G22) |
| covariance of returns (C10) | expected returns (G17) |