Abstract
A number of recent papers have focused on testing the linearity restrictions implied by international asset pricing models. The tests, however, have not addressed an additional restriction implied by the models; namely, that the risk premium on the world portfolio is positive. This study provides a direct assessment of this restriction. The evidence indicates that the ex ante world market risk premium can be negative. The results are robust to market proxies that are hedged and unhedged with respect to currency risk. Subperiod analysis indicates that the rejection of the positive risk premium restriction is driven by the first half of the sample period.
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