Pricing Currency Risk in Two Interlinked Stock Markets

  • Jan Antell Hanken School of Economics
  • Mika Vaihekoski University of Turku
Keywords: international asset pricing model, currency risk, devaluation, multivariate GARCH-M


We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rate regime. Tests are conducted for a conditional asset pricing model using the Ding and Engle (2001) specification which allows estimation of multivariate GARCH-in mean models. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the flotation of the currencies. We also find some evidence of crosscountry exchange rate effects. Our model has many practical applications and can easily be applied to study other countries, different asset classes, or industries that are closely connected.


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Author Biographies

Jan Antell, Hanken School of Economics

Jan Antell is Associate Professor in Finance at the Hanken School of Economics, Finland.

Mika Vaihekoski, University of Turku

Mika Vaihekoski is Professor of Corporate Finance at the University of Turku, Finland.

How to Cite
Antell, J., & Vaihekoski, M. (2016). Pricing Currency Risk in Two Interlinked Stock Markets. Applied Finance Letters, 1(1), 16-21.
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