| In the international capital markets, financial assets bear premia for nondiversifiable, or systematic risk. In this dissertation, a partial-equilibrium asset pricing paradigm is developed to model these risk premia. The model is based on the specification of stochastic state variables as continuous-time, Markov diffusion processes. The risk premia of financial assets are generated by covariances of asset returns with changes in the stochastic state variables. These covariances are classified into meaningful groups, each representing a distinct category of nondiversifiable risk. These categories are designated "systematic asset risk", "systematic exchange risk" and "pure exchange risk". The systematic risk categories generate distinct and additive risk premia, which collectively constitute the total risk premium of the financial asset.; The asset pricing model is empirically estimated using monthly data for seven major industrialized countries. It is found that the distributional assumptions of the model are supported by the data. The risk premium of each asset is then empirically decomposed into the three premia specified in the theory. Unlike the findings in the literature, of insignificance in the covariances which generate systematic exchange risk, our results indicate that the premium for systematic exchange risk is not insignificant relative to the other two premia. |
