Pricing of Foreign Exchange Risk from a German Investor's Perspective

Abstract

We investigate the pricing of exchange risk using two international asset pricing model (IAPM) specifications: one model with a single currency index beside the world market factor (CI-IAPM) and a second employing three exchange risk variables to mirror the Triad regions (“Triad”-IAPM). For the total period we find significant exchange risk premia for both models. Sub-period and moving-window results are mixed and indicate pronounced time-variation. However, contrary to the CI-IAPM, the “Triad”-IAPM provide evidence on systematic exchange risk in more recent time. Consequently, the “Triad”-IAPM helps to gain a more differentiated picture on the pricing of exchange risk compared to most IAPMs which use only a single currency index.