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International Asset Excess Returns and Multivariate Conditional Volatilities

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Abstract

This paper constructs a multivariate model in relating multi-asset excess returns to their conditional variances. Applying weekly data to investigate the foreign-exchange risk premium, the evidence from a multivariate GARCH model shows that the foreign-exchange excess returns are significantly correlated with economic fundamentals such as the real interest-rate differential, long-short interest-rate spread differential, and equity-premium differential. The evidence also suggests that foreign-exchange excess returns are not independent of the conditional variances of these fundamental variables, supporting the time-varying risk-premium hypothesis.

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Authors and Affiliations

  1. Department of Finance, Drexel University, 3141 Chestnut Street, Philadelphia, PA, 19104, USA

    Thomas C. Chiang

  2. Department of Finance, National Chung Hsing University, 250 Kuo Kuang Road, Taichung, 402, Taiwan ROC

    Sheng-Yung Yang

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  1. Thomas C. Chiang
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  2. Sheng-Yung Yang
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Correspondence to Thomas C. Chiang.

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Chiang, T.C., Yang, SY. International Asset Excess Returns and Multivariate Conditional Volatilities. Rev Quant Finan Acc 24, 295–312 (2005). https://doi.org/10.1007/s11156-005-6868-2

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  • DOI: https://doi.org/10.1007/s11156-005-6868-2

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