Date of Graduation


Document Type


Degree Type



Chambers College of Business and Economics



Committee Chair

Ronald J. Balvers.


This dissertation attempts to assess the ability of various international asset pricing models in explaining asset returns across countries. The Introduction discusses the links between the chapters, the contributions I make and states what I have learned from the dissertation. Chapter 1 of the dissertation derives (in a discrete time framework to facilitate the transition from theory to empirical analysis) a consumption based capital asset pricing model with the added feature of a "keeping up with the Joneses" utility function and applies it in an international context to explain return differences across countries. Relying on the Lucas (1978) asset pricing framework, relating aggregate consumption to aggregate production, the model suggests that the exposure of assets to world-wide aggregate production risk as well as to U.S. aggregate production risk are the key factors in explaining cross-sectional differences in international returns. Chapter 2 of the dissertation examines and compares the standard international asset pricing models in the existing literature, including the international CAPM without exchange rate risks, the international CAPM with exchange rate risks (Adler and Dumas, 1983) and the international version of Fama-French three-factor model, (Fama and French, 1998). Results obtained from a Fama-MacBeth (1973) two-stage regression approach (with Shanken correction for standard errors) show that neither my two-factor CCAPM derived in Chapter 1 nor the existing models considered in Chapter 2 with constant risk premium and time-varying betas seem to be able to capture the return variations across countries. However, I do find some evidence that my two-factor CCAPM may be the one that is most consistent with the data. The international CAPM with exchange rate risks outperforms the international CAPM without exchange rate risks and the Fama-French three-factor model in explaining index returns across international markets. Chapter 3 of the dissertation investigates the role of the exchange rate risks in international asset pricing by looking at the effects of changes in exchange rate regime on the variability of stock returns, based on Hong Kong's experience. Two propositions regarding the variability of stock returns as well as the variability of other key macroeconomic fundamentals influenced by the shift of exchange rate regime are derived theoretically from a combination of a stochastic dynamic Mundell-Fleming framework and the Lucas Asset Pricing Model. My results support the importance of exchange rate risks from a different perspective.