Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233279 
Year of Publication: 
2011
Series/Report no.: 
Discussion paper No. 63
Publisher: 
Aboa Centre for Economics (ACE), Turku
Abstract: 
We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets as well as the price to be lower after the flotation of the currencies. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.
Subjects: 
conditional
international asset pricing model
currency risk
devaluation
multivariate GARCH-M
Finland
Sweden
JEL: 
G12
G15
Document Type: 
Working Paper

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