if international market fully integrated, dose that mean no currency risk, all parity relationship hold true at all time? what conclusion could be drawn upon it? Thanks.
currency risk is just inflation risk you can’t earn excess returns by investing in a country with high interest rates because it’ll be accompanied by currency depreciation
shoot i jumped to a conclusion there i was thinking of what happens when all of the parity relationships hold (fisher, PPP, etc). not sure if international markets being fully integrated implies that though
I think you are right Slash. If markets are integrated then financial capital is free to move around the world and equalize real rates. If real rates are the same then fischer holds and then inflation dictates currency moves. Overall idea is that risk adjusted positive returns won’t be possible by moving captial from country to country.
it makes intuitive sense but i’m not sure if i read that anywhere. i’ll double check. i know that there are 5 conclusions to be drawn when the parity relationships hold (basically the same 2 points that i mentioned) but i have to review what happens when markets are fully integrated. my concern is that ICAPM has foreign currency risk premiums but one of the points of the former was that there’s no FCRP
Real rates could be constant and you could still have FCRP, but of course relative PPP couldn’t hold. Report back if you find anything.
oh wait… ICAPM doesn’t need markets to be fully integrated. i’ll shut up now and just read it
market integration allows investors to seek out the most efficient ways to invest and actually be able to implement it. so having the parity relationships hold true defeats the purpose of ICAPM. one doesn’t imply the other though
What are the assumptions? I always get them wrong. It isn’t identifiable consumption baskets (pretty sure).
What the heck is a consumption basket anyway?
Just looked, identifiable consumption baskets are for extended CAPM which of course doesn’t hold. The assumptions for ICAPM will have to wait till tomorrow for me to look them up.