Developing a Measurement Model for the Sensitivity Analysis of Asset Returns with Regard to Beta Index of Exchange Rate in the Context of the Modified Capital Asset Pricing Model

Advances in Mathematical Finance and Applications

مقاله 7، دوره 6، شماره 3، مهر 2021، صفحه 515-533   

نوع مقاله: Research Paper

شناسه دیجیتال (DOI): 10.22034/amfa.2019.1871942.1245

نویسندگان

Reza Alizadeh؛ Farhad Dehdar^* ؛ Mohammadreza Abdoli

Department of Accounting, Shahrood Branch, Islamic Azad University, Shahrood, Iran

چکیده

With increasing trade among different countries The exchange rate fluctuations, consumption, inflation, and market portfolios are considered as major risk factors in financial markets. Hence this study aimed to examine the relationship between the exchange rate fluctuations and asset returns within a theoretical and empirical model, i.e. Consumption-based Capital Asset Pricing Model (CCAPM). To this end, a basic CCAPM was extended and imported consumables were included in Epstein and Zin’s recursive utility function. The research sample encompassed eight portfolios and monthly data from 2003 to 2014. The pricing model parameters were estimated using Euler's equations and Hansen and Singleton’s generalized method of moments (GMM). An estimation of the parameters of Euler's equations indicates the risk aversion and tolerance of economic factors, low elasticity of substitution for domestic consumables and imported consumables, and high elasticity of intertemporal substitution. In the next step, using Euler’s linearized equations as asset pricing model and Fama and Macbeth's two-step regression method, the effects of exchange rate risk premium, inflation, market efficiency, and consumption growth on return premium on assets were investigated. The results indicated the positive impact of the exchange rate risk premium, inflation, and market returns on the return premium on assets.

کلیدواژه‌ها

Risk aversion؛ elasticity of substitution؛ recursive utility؛ CCAPM؛ GMM method

مراجع

[1] Antell, J., Vaihekoski, M. International asset pricing models and currency risk: evidence from Finland 1970–2004. Journal of Banking and Finance, 2007, 31(9), P. 2571-2590. Doi: 10.1016/j.jbankfin.2006.09.013.

 

[2] Aggarwal, R., Harper, J. T. Foreign exchange exposure of "domestic" corporations. Journal of International Money and Finance, 2010, 29(8), P. 1619-1636. Doi: 10.1016/j.jimonfin.2010.05.003.

 

[3] Adler, M., Dumas, B., Exposure to currency risk: Defination and measurement. Financial Management, 1984, 13, P. 41-50. Doi: 10.2307/3665446.

 

[4] Bach, C., Moller, S. Habit-based asset pricing with limited participation consumption. Journal of Banking and Finance, 2011, 35(11), P. 2891–2901. Doi: 10.1016/j.jbankfin.2011.03.014.

 

[5] Cohen, R. B., Polk, C., and Vuolteenaho, T. The value spread. Journal of Finance, 2003, 58(2), P. 609–641. Doi: 10.1111/1540-6261.00539.

 

[6] Campbell, J. Y., Cochrane, J. H. Explaining the poor performance of consumption-based asset pricing models. Journal of Finance, American Finance Association, 2000, 55(6), 2863-2878. 10.1111/0022-1082.00310.

 

[7] Carhart, M.M., On Persistence in Mutual Fund Performance. s.l.: Journal of Finance, 1997, 66(4), P. 457-472. Doi: 10.2307/2329556.

 

[8] Chaieb, I., Mazzotta, S. Unconditional and conditional exchange rate exposure. Journal of International Money and Finance, 2013, 32(1), P. 781-808. Doi: 10.1016/j.jimonfin.2012.07.001.

 

[9] Chkili, W., Nguyen, D. K. H. Exchange rate movements and stock marketreturns in a regime-switching environment: evidence for BRICS countries. Research in International Business and Finance, 2014,31, P. 46-56. Doi: 10.1016/j.ribaf.2013.11.007.

 

[10] Cochrane, J. H. A cross-sectional test of an investment-based asset pricing model. Journal of Political Economy, 1996, 104 (3), P. 572-621. Doi: 10.1086/262034.

 

[11] Dunn, K. B., Singleton, K. J. Modeling the term structure of interest rates under non-separable utility and durability of goods. Journal of Financial Economics, 1986, 17(1), P. 27–55. Doi: 0304-405X(86)90005-X.

 

[12] Dreyer, J. K., Schneider, J., Smith, W.T. Saving-based asset-pricing. Journal of Banking and Finance, 2013, 37(9), P. 3704-3715. Doi: 10.1016/j.jbankfin.2013.04.034.

 

[13] Epstein, L., Zin, S. Substitution risk aversion and the temporal behaviour of consumption and asset returns: a theoretical framework. Journal of Econometrica, 1989, 57, P. 937-968. Doi: 10.2307/1913778.

 

[14] Errunza, V., Losq E,. International Asset Pricing under Mild Segmentation: Theory and Test. The Journal of Finance., 1985, 40(1), P. 105-124. Doi: 10.2307/2328050.

 

[15] Epstein, L., Zin, S. Substitution, risk aversion and the temporal behavior of consumption and asset returns: an empirical investigation. Journal of Political Economy, 1991, 99(2), 263-286. 10.1086/261750.

 

[16] Fama, E., French, K., Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 1993, 33, P. 3-56. Doi: 10.1016/0304-405X(93)90023-5.

 

[17] Gutierrez C. E. C., Issler, J. V. Evaluating the effectiveness of common-factor portfolios. MPRA Paper, 2015, No. 66077.

 

[18] Hansen, L., Singleton, K., Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models. Econometrica, 1982, 50(5), P. 1269-1286. Doi:10.2307/1911873

 

[19] Izadikhah, M., Khoshroo, A., Energy management in crop production using a novel fuzzy data envelopment analysis model, RAIRO-Oper. Res., 2018, 52 (2), P. 595-617, Doi: 10.1051/ro/2017082

 

[20] Jorion, P., The pricing of exchange rate risk in the stock market. Journal of Financial and Quantitative Analysis, 1991, 26, P. 363-376. Doi: 10.2307/2331212.

 

[21] Kreps, D. M., Porteus, E. L. Temporal resolution of uncertainty and dynamic choice theory. Journal of Econometrica, 1978, 46(1), P. 185–200.

 

[22] Lettau, M., Ludvigson, S. Resurrecting the (C)CAPM: A cross-sectional test when risk premia are time-varying. Journal of Political Economy, 2001, 109(6), P. 1238-1287. Doi: 10.2307/1913656.

 

[23] Mehra, R., Prescott, E. C. The equity premium: a puzzle. Journal of Monetary Economics, 1985, 15(2), P. 145-161. Doi: 10.1016/0304-3932(85)90061-3.

 

[24] Miao, B., Zhou, S., Nie, J., Zhang, Z. Renminbi exchange rate exposure: evidence from chinese industries. Journal of Chinese Economic And Business Studies, Taylor and Francis Journals, 2013, 11(4), P. 229-250. Doi: 10.1080/14765284.2013.838386.

 

[25] Mohammadzadeh, A., Shahikitash, M. N., Roshan, R. Comparison of consumption based capital asset pricing (CCAPM) and housing CCAPM (HCCAPM) model in explaining stock returns in Iran.Quarterly Journal of Applied Theories of Economics, 2015, 2(3), P. 49-72, (in Persian). ISSN: 2423-6586.

 

[26] Mouna, A., Jarboui A, M. The impact of interest rate and exchange rate volatility on bank’s returns and volatility: evidence from Tunisia. International Journal of Information Business and Management, 2013, 5(4), P. 73-90. Doi: 10.1016/j.econmod.2011.01.015.

 

[27] Olufem, A. T. Exchange rate risks exposure of Negerian listed firms: an empirical examination. International Business Research, 2011, 4(2), P. 219-225. Doi: 10.5539/ibr.v4n2p219.

 

[28] Ogaki, M., Carmen, M. R. Measuring intertemporal substitution: the role of durable goods. Journal of Political Economy, 1998, 106 (5), P. 1078–1098. Doi: 10.1086/250040.

 

[29] Pepin, D. Intertemporal substitutability, risk aversion and asset prices. Economics Bulletin, 2015, 35(4), P. 2233-2241.

 

[30] Parsa, B., Sarraf, F. Financial Statement Comparability and the Expected Crash Risk of Stock Prices. Advances in Mathematical Finance and Applications, 2018, 3(3), P. 77-93. Doi: 10.22034/amfa.2018.544951

 

[31] Reilly Frank, K., Keith, C. Investment analysis and portfolio management. The Dryden press, 6Ed, 2000.

 

[32] Roshan, R., Pahlavani, M., Shahikitash, M. N. Investigation on importance of relative consumption and risk aversion in consumption expenditures of Iranian households by GMM approach. Quarterly Journal of Applied Economic Studies in Iran, 2013, 2(8), P. 13-31,(in Persian). Doi: 10.22099/ijes.2017.26599.1351.

 

[33] Salehi, A., Baharipour, A., Mohammadi, S. The Impact of Institutional Ownership on the Relationship between Tax and Capital Structure. Advances in Mathematical Finance and Applications, 2016, 1(2), P. 57-67. Doi: 10.22034/amfa.2016.527820

 

[34] Saleem, K. Inflation risk, exchange rate risk and asset returns: evidence from Korea, Malaysia, and Taiwan. The Journal of Applied Business Research, 2013, 29(4), P. 1209-1222. Doi: 10.2139/ssrn.1663426.

 

[35] Shaki, S., Toufighi, H. The effect of exchange rate fluctuations on Iran’s stock market returns. Paper presented at 2^nd National Conference on Economic Development Strategies with a Focus on Regional Planning, Sanandaj, Islamic Azad University, Sanandaj Branch, 2012 (in Persian). , LSAF-EA2429, F-69007.

 

[36] Sitkin, S. B., Weingart, L. R. Determinants of risky of decision-making behavior: a test of the mediating role of risk perception and propensity. Academy of Management Journal, 1995, 8(6), P. 1573-1592. Doi: 10.2307/256844.

 

[37] Stillwagon, J. R. Can the consumption capital asset pricing model account for traders' expected currency returns? Review of International Economics, 2015, 23 (5), P. 1044–1069, Doi: 10.1111/roie.12195.

 

[38] Vakilifard, H. R., Ali Farry, M. The effect of currency rate fluctuation on stock return of companies admitted in Tehran Stock Exchange. Quarterly Journal of Economics, 2015, 9(30), P. 83-98. (in Persian). Doi: 10.22108/AMF.2017.21420.

 

[39] Weil, P. The equity premium puzzle and the risk-free rate puzzle. Journal of monetary economics, 1989, 24(3), P. 401–421. Doi: 10.3386/w2829.

 

[40] Xiao, Y., Faff, R., Gharghori, P., Min, B. Pricing innovations in consumption growth: a re-evaluation of the recursive utility model. Journal of Banking and Finance, 2013, 37(11), P. 4465-4475. Doi: 10.1016/j.jbankfin.2012.08.015.

 

[41] Yogo, M. A consumption-based explanation of expected stock returns. Journal of Finance, American Finance Association, 2006, 61(2), P. 539-580.  Doi: 10.1111/j.1540-6261.2006.00848.x.

 

[42] Yogo, M. Essays on consumption and expected returns. Ph.D. Thesis, Harvard university, 2004.

 

[43] Zalaghi, H., Godini, M., Mansouri, K. The Moderating Role of Firms characteristics on the Relationship between Working Capital Management and Financial Performance. Advances in Mathematical Finance and Applications, 2019, 4(1), P. 71-88. Doi: 10.22034/amfa.2019.581878.1158