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 literature review concludes that there is no consensus regarding the most suitable international asset pricing model for calculating discount rates for emerging countries.
1980), "A Generalization of the International Asset Pricing Model," Revue de la Association Francaise de Finance 1(1): 91-135.
After reviewing the theoretical and applied literature on cost of capital determination and international asset pricing models, the paper identifies and applies methodologies to determine discount rates applicable to emerging markets for different countries and currencies and develops methodologies for empirically measuring exposure to the country credit risk factor.
For example, there are several international asset pricing models that calculate the returns required for various asset classes (Bekaert et al.
This paper begins by presenting a review of the literature on international asset pricing models, offering also a summary of specific "frequent" practices, then develops a method for estimating the exposure to a second risk factor that relates to country risk, in addition to the estimating exposure to the traditional market risk factor or Beta.
2012) determined that, in addition to exposure to a global market portfolio, exposure to a global credit risk factor (measured as the difference between the equity returns for countries with low and high risk ratings) is significant for explaining the dispersion of returns among countries, reducing the errors in international asset pricing models, and underlining the importance of local factors.
In summary, given the evidence of increasing integration, it would be appropriate to use international asset pricing models to determine the cost of capital, with the first risk factor given by the exposure to global equity risk.
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.
All these theoretical models and empirical tests are consistent with our international asset pricing model with information costs, which explain the home bias equity in international finance.
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