Are Financial Assets Priced Locally or Globally?

G. Karolyi () and René Stulz

No 8994, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset pricing models with mean-variance investors predict that an asset's risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country's risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase global influences on asset prices.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2002-06
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ifn
Note: AP CF
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Citations: View citations in EconPapers (142)

Published as Karolyi, G. Andrew & Stulz, Rene M., 2003. "Are financial assets priced locally or globally?," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 16, pages 975-1020 Elsevier.

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