International Asset Pricing Model

International Asset Pricing Model (IAPM)

The international version of the CAPM assuming that investors in each country share the same consumption basket and purchasing power parity holds.

International Asset Pricing Model

A version of the Capital Asset Pricing Model applied to international investments. Like the CAPM, it attempts to describe the relationship between the risk and the expected return on an investment, which is used to determine an investment's appropriate price. The assumption behind the CAPM is that money has two values: a time value and a risk value. Thus, any risky asset or investment must compensate the investor for both the time spent with his/her money tied up in the investment and the investment's relative riskiness. This compensation must be in addition to the risk-free rate of return. It is important to note that in addition to these factors (which the CAPM and the IAPM hold in common), the IAPM assumes that purchasing power parity holds true in the countries it is investigating.
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The next section presents an international asset pricing model in the presence of the shadow costs of incomplete information.
Up to now we have considered that the purchasing power party does not hold, in this case the international asset pricing model includes K + 1 risk premia, one for the global market portfolio, one for the valuation currency's own inflation and K-1 additional risk that reflect the other country's uncertain inflation.
Equation (14) characterizes the currency index international asset pricing model within information uncertainty.
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