Increasing capital market integration has important implications for the calculation of the cost of capital. In an integrated world the cost of capital should be determined using the International Capital Asset Pricing Model rather than the domestic Capital Asset Pricing Model. In this paper we...

Risk premia, peso-problems and market-inefficiencies have been suggested as candidate explanations for the apparent rejection of the unbiased hypothesis. If various explanations interact, a panel approach is called for. In this paper we estimate different panel models, that allow for...

The paper looks at currency hedging and international diversification of equity portfolios from a safety first perspective. We modify Arzac and Bawa's (1977) version of the Roy's safety first criterion and show how it can be successfully improved upon by exploiting the fat tail property of asset...

In this paper hedging foreign currency exposure is reconsidered. We investigate the sensitivity of hedge ratios for the well-documented existence of unconditional kurtosis in asset and exchange rate returns. We derive theoretical hedge ratios for fat-tailed asset return distributions and find...

In this paper we investigate purchasing power parity (PPP) in a panel with 17 countries for the period 1972 through 1996. The novel feature of our panel methodology is that results are invariant to the choice of a benchmark on numeraire currency. In the panel we allow individual country effects...

For three out of five major stockmarkets it is found that those levels which are a multitude of a hundred are approached and transgressed infrequently. We explicitly test for the effect of sample bias and conduct a forecasting experiment

This paper analyzes the properties of multivariate tests of purchasing power parity (PPP) that fail to take heterogeneity in the speed of mean reversion across real exchange rates into account. We compare the performance of homogeneous and heterogeneous unit root testing methodologies. The...

Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of mean reversion across real exchange rates. In contrast to several other severe restrictions of panel models and tests of PPP, the assumption of homogeneous mean reversion...

In this paper we examine the impact of domestic and ERM-wide monetary conditions on national inflation rates in Belgium, France, Germany, Italy and the Netherlands for the period 1973-1994 and two sub periods using an extended open-economy version of the standard P*-model. The results show that...

It is well known that returns on foreign exchange rates are not normal and tend to have fat-tailed distributions. Although the precise magnitude of the tail-fatness is crucial for applications such as risk analysis, little consensus exists in this respect due to estimation problems. In this...