Currency risk in excess equity returns: A multi time-varying beta approach

Abstract

This paper proposes a multi time-varying beta multivariate generalised autoregressive conditional heteroskedastic (MGARCH) framework for estimating and testing conditional multi-factor asset pricing models. The framework nests a number of asset pricing models, and is especially useful when the betas and the factors themselves are of interest. The empirical study is concerned with the significance of a currency risk factor in the returns to a UK share price index - the FT Industrial Ordinary. Results are presented for models with time-varying multi-betas for the risk factors associated with the market, exchange rate volatility and inflation-differentials. © 2004 Elsevier B.V. All rights reser..