Author Description

The observed predictability of excess returns in equity & foreign exchange markets has largely been attributed to the presence of time-varying risk premiums in these markets. This paper evaluates excess asset returns in those markets by combining generalized preferences to a heteroscedastic driving process in the same model. It extends the international asset pricing model of Bekaert, Hodrick, and Marshall (1997), in which the authors adopt disappointment-aversion-type preferences and a homoscedastic exogenous environment. The paper demonstrates the degree of success in generating predictability & moment levels of excess returns that are consistent with the sample data, using the very general framework presented.