An Empirical Analysis of the International Asset Pricing Model

Soonho Kim

Journal of Insurance and Finance

2014, 25(1), pp.109-139
Publisher : Korea Insurance Research Institute
Research Area : Business Management

Soonho Kim ¹

¹ 국민연금연구원

ABSTRACT

This paper examines global integration and/or co-movement and identifies a number of risk factors in the international stock market by using factor analysis. Based on the identified number of risk factors, the related economic fundamentals of global risk factors are studied. The global integration phenomenon is evident and is increasing gradually. Since 2000, the global risk factors have accounted for up to 78% of each stock market variation. In this study, the method of Bai and Ng (2002) and a new methodology proposed in this study are applied to uncover a number of risk factors. Based on the latter method, three risk factors are identified. The first risk factor is the global market factor. The second and third risk factors are related to macro-variables of global real economy and global financial market. The null hypothesis that the pricing error measured by Hansen-Jagannathan Distance is zero cannot be rejected when tradable risk factors are constructed using tracking portfolios with proper base assets.
KEYWORDS

International Capital Asset Pricing Model , International Arbitrage Pricing Theory
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