NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Global Financial Markets and the Risk Premium on U.S. Equity

K.C. Chan, G. Andrew Karolyi, Rene M. Stulz

NBER Working Paper No. 4074
Issued in May 1992
NBER Program(s):   AP

We document that there is a significant foreign influence on the risk premium of U.S. assets. Using a bivariate GARCH-in-mean process for conditional expected excess returns, we find that the conditional expected excess return on U.S. stocks is positively related to the conditional covariance of the return of these stocks with the return on a foreign index but is not related to its own conditional variance. Further, we are unable to reject the international version of the CAPM. Evidence is presented for different model specifications, multiple-day returns and alternative proxies of foreign stock returns including the Nikkei 225 Stock Average, Morgan Stanley Japan and Morgan Stanley EAFE indices.

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Document Object Identifier (DOI): 10.3386/w4074

Published: Journal of Financial Economics, (1992), p. 137-168

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