Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-28T21:16:03.111Z Has data issue: false hasContentIssue false
  • English
  • Français

Consumption Basket, Exchange Risk, and Asset Demand

Published online by Cambridge University Press:  01 December 2009

Jongmoo Jay Choi
Get access Rights & Permissions [Opens in a new window]

Extract

Foreign exchange risk and hence the demand for foreign assets depend on the objective and habitat of investors. The investment objective, in turn, is contingent upon how the consumption basket or its price is defined. If the investor is “domestic” in the sense that he or she spends all income on domestic goods, then the domestic price index should be used in defining the investment objective in real terms, regardless of whether returns are generated at home or abroad. However, for an investor who consumes a mix of foreign and home products, or for multinational firms with extensive operations outside their home countries, some sort of world price reflective of the relative importance of home and foreign goods in their consumption basket is the proper deflator.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 19 , Issue 3 , September 1984 , pp. 287 - 298
Copyright
Copyright © School of Business Administration, University of Washington 1984

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Adler, M., and Dumas, B.. “The Exposure of Long-Term Foreign Currency Bonds.” Journal of Financial and Quantitative Analysis, Vol. 15 (November 1980). pp. 973–995.CrossRefGoogle Scholar
[2]Adler, M., “International Portfolio Choice and Corporation Finance: A Synthesis.” The Journal of Finance, Vol. 38 (June 1983). pp. 925–984.CrossRefGoogle Scholar
[3]Breeden, D. T. “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities.” Journal of Financial Economics, Vol. 7 (September 1979). pp. 265–296.CrossRefGoogle Scholar
[4]Cornell, Bradford. “The Consumption-Based Asset Pricing Model: A Note on Potential Tests and Application.” Journal of Financial Economics, Vol. 9 (March 1981), pp. 103–108.CrossRefGoogle Scholar
[5]Dornbusch, Rudiger. “Exchange Rate Risk and the Macroeconomics of Exchange Rate Determination.” National Bureau of Economic Research. Working Paper No. 493 (June 1980).CrossRefGoogle Scholar
[6]Eaker, Mark R. “The Numeraire Problem and Foreign Exchange Risk.” The Journal of Finance, Vol. 36 (May 1981), pp. 419–426.CrossRefGoogle Scholar
[7]Eun, Cheol S. “Global Purchasing Power View of Exchange Risk.” Journal of Financial and Quantitative Analysis, Vol. 16 (December 1981), pp. 639–650.CrossRefGoogle Scholar
[8]Fama, E. F., and Farber, A.. “Money. Bonds, and Foreign Exchange.” American Economic Review, Vol. 69 (September 1979), pp. 639–649.Google Scholar
[9]Frankel, J. A. “The Diversifiability of Exchange Risk.” Journal of International Economics, Vol. 9 (August 1979). pp. 379–394.CrossRefGoogle Scholar
[10]Grauer, F. L. A; Litzenberger, R. H.; and Stehle, R. E.. “Sharing Rules and Equilibrium in an International Capital Market under Uncertainty.” Journal of Financial Economics, Vol. 3 (June 1976). pp. 233–256.CrossRefGoogle Scholar
[11]Heckerman, D. “On the Effects of Exchange Risk.” Journal of International Economics, Vol. 3 (November 1973), pp. 379–388.CrossRefGoogle Scholar
[12]Hodder, James E. “Exposure to Exchange-Rate Movements.” Journal of International Economics, Vol. 13 (November 1982), pp. 375–386.CrossRefGoogle Scholar
[13]Kouri, Pentti J. K., and de Macedo, J. B.. “Exchange Rates and the International Adjustment Process.” Brookings Papers on Economic Activity, Vol. 1 (1978). pp. 111–150.CrossRefGoogle Scholar
[14]Krugman, Paul. “Consumption Preferences. Asset Demands, and Distribution Effects in International Financial Markets.” National Bureau of Economic Research. Working Paper No. 651 (March 1981).CrossRefGoogle Scholar
[15]Makin, John H. “Portfolio Theory and the Problem of Foreign Exchange Risk.” The Journal of Finance, Vol. 33 (May 1978). pp. 517–534.CrossRefGoogle Scholar
[16]Merton, R. “Optimum Consumption and Portfolio Rules in a Continuous Time Model.” Journal of Economic Theory, Vol. 3 (December 1971). pp. 373–413.CrossRefGoogle Scholar
[17]Officer, L. H. “The Purchasing-Power-Parity Theory of Exchange Rates: A Review Article.” IMF Staff Papers, Vol. 23 (March 1976). pp. 1–60.CrossRefGoogle Scholar
[18]Roll, Richard, and Solnik, Bruno. “A Pure Foreign Exchange Asset Pricing Model.” Journal of International Economics, Vol. 7 (May 1977). pp. 161–180.CrossRefGoogle Scholar
[19]Solnik, B. H. “An Equilibrium Model of the International Capital Market.” Journal of Economic Theory, Vol. 8 (August 1974). pp. 500–524.CrossRefGoogle Scholar
[20]Solnik, B. H. “International Arbitrage Pricing Theory.” The Journal of Finance, Vol. 38 (May 1983). pp. 449–457.CrossRefGoogle Scholar
[21]Solnik, B. H. “International Parity Conditions and Exchange Risk.” Journal of Banking and Finance, Vol. 2 (October 1978), pp. 281–293.CrossRefGoogle Scholar
[22]Stulz, Rene M. “A Model of International Asset Pricing.” Journal of Financial Economics, Vol. 9 (December 1981), pp. 383–406.CrossRefGoogle Scholar
[23]Thomas, Lee. “Nominal Interest Differentials, Expected Exchange Rate Changes, and Fisher's Hypothesis.” Unpublished manuscript (1983).Google Scholar
[24]Wihlborg, Clas. Currency Risks in International Financial Markets, Princeton Studies in International Finance, No. 44 (1978).Google Scholar