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We consider a world capital market in which the investor population is heterogenous. Investors of different countries differ in the prices of goods at which they consume the income from their investments. In such a setting, the international CAPM incorporates rewards for exchange rate risk, in...
Persistent link: https://www.econbiz.de/10012763398
This paper characterizes the forces that determine time-variation in expected international asset returns. We offer a number of innovations. By using the latent factor technique, we do not have to prespecify the sources of risk. We solve for the latent premiums and characterize their...
Persistent link: https://www.econbiz.de/10012763249
Dixit (1988) observed that the mathematical construct of "regulated Brownian motion" developed by Harrison (1985) had proved useful in economic models of decision-making under uncertainty. In a recent note he provided a number of methods for calculating expected discounted payoff functions based...
Persistent link: https://www.econbiz.de/10013239196
This paper extends the Krugman target zone model by including a realignment mechanism. Various properties of that realignment mechanism are discussed. The movement of the exchange rate is governed both by a Wiener process on fundamental and by a Poisson jump process with endogenous realignment...
Persistent link: https://www.econbiz.de/10013243380
Entry into a market seems to necessitate some investment into "marketing capital" (or distribution capital: advertising, dealerships etc ... ). This form of investment has the property that, if it is unused for some time, it quickly becomes worthless. When entry into a market requires marketing...
Persistent link: https://www.econbiz.de/10013141151
In this essay, I discuss and compare two ways of modeling international capital market equilibrium: the orthodox, general-equilibrium approach and the heterodox, partial-equilibrium CAPM (Capital Asset Pricing Model) approach. The benchmark for this comparison is the model's ability to provide...
Persistent link: https://www.econbiz.de/10013245520
We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals. We determine how informational advantages by domestic investors in the interpretation of home public signals impact equity markets....
Persistent link: https://www.econbiz.de/10013130709
Previous work by Dumas and Solnik (1993) has shown that a CAPM which incorporates foreign-exchange risk premia (a so-called 'international CAPM') is better capable empirically of explaining the structure of worldwide rates of return than does the classic CAPM. In the specification of that test,...
Persistent link: https://www.econbiz.de/10012788525
How does a firm in one country evaluate an investment in a firm in another country, or how does it evaluate a foreign project that the firm itself is undertaking? The firm must estimate future free cash flows just as in a domestic project, but choosing an appropriate discount rate is a...
Persistent link: https://www.econbiz.de/10012762708
Transferring physical capital and transferring production and sales activities from one country to the other typically entails large adjustment costs. The model of this paper features two homogeneous stocks of physical capital located in two different countries separated by an 'ocean'. The two...
Persistent link: https://www.econbiz.de/10012762738