Abstract
In this paper, we test a conditional version of the international asset pricing model, using the multivariate GARCH process of De Santis and Gerard (1998). The model is estimated, over the period January 1997-March 2007, for five markets: the global, USA, Egyptian, Turkish and Israeli markets. We analyze a version of the ICAPM with a constant market risk price as well as the exchange rate risk price, while the conditional covariances vary over time. The results show that risk premium vary significantly across markets and over time, for all stock markets the contribution of currency premium to the total risk premium is economically significant. This study confirms that currency risk is a significant factor in the international valuation of financial assets.
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