Risk premia in Pacific-Basin capital markets

We study the extent to which exposure to global risk factors explains excess returns in Pacific-Basin capital markets. These risk premia are analyzed using a multiperiod asset pricing model of global equity markets. A feature of this model is that we allow risk premia to change through time in response to global macroeconomic factors. We find that factors that influence Pacific-Basin markets are similar to those operating in other capital markets. These risk premia reflect a systematic response to changes in global economic conditions. However, this region is more exposed to global risk factors than is the United States. Furthermore, the composition of the risk premium differs across capital markets of the Pacific-Basin. In particular, the Japanese market is more exposed to global market and currency factors than is any other market in the region. We argue that this is consistent with observed differences in average excess returns within the region.