Pricing Together Developed and Emerging Markets with Multiple Risk Factors

We test various international asset pricing models with multiple risk factors in a large cross section through time. Despite the cross-sectional variation of our sample countries, the integration hypothesis is supported even when we pool Emerging with Developed Markets. Besides the world market risk which is always significant and robust in all our models, time-varying intertemporal risk is priced alongside exchange rate risk. Yet, disentangling currency and intertemporal risks requires careful analysis when conditional time-variation is introduced, as both risks are likely proxies of the state variables that affect asset prices over time. A model with residual intertemporal risk in addition to the other sources of risk is statistically different from one with only currency risk and delivers a small and insignificant alpha on average and through many of the weeks in our time sample. Across the countries, the fit of the conditional model with multiple risk factors is three times better for Developed Markets than for Emerging Markets.