Covered interest parity seems to hold more strongly for short-term assets than for long-term assets. Credit limits have been suggested as a possible explanation of this phenomenon. This paper contests that hypothesis.

We test for the pricing of exchange rate and foreign inflation risk in equities. Our tests are motivated by the empirical implications of the models of Solnik (1974b) as revised by Sercu (1980), Grauer, Litzenberger, and Stehle (1976), and Adler and Dumas (1983). Both exchange rate and foreign...