Can the exchange rate, inflation and domestic risk factors be overlooked in international asset pricing?

Abstract

This paper analyses the economic relevance of several factors on asset pricing in the international stock market over the last thirty years for twenty-two countries of different economic regions. We reject the hypothesis of financial integration. Moreover, exchange rate and inflation risks are significantly priced for the EMU previous years while only exchange rate risk premiums are significant in the post-euro period. Besides, market, inflation and exchange premias are less important after the adoption of euro whereas domestic risk premias for regions are more important than before. Furthermore, the causality and time-variation of the prices of these risks drives the predictable variation of returns.