Developing a Measurement Model for the Sensitivity Analysis of Asset Returns with Regard to Beta Index of Exchange Rate in the Context of the Modified Capital Asset Pricing Model

With increasing trade among different countries the exchange rate fluctuations, consumption, inflation, and market portfolios are considered as major risk factors in financial markets. Hence this study aimed to examine the relationship between the exchange rate fluctuations and asset returns within a theoretical and empirical model, i.e. Consumption-based Capital Asset Pricing Model (CCAPM). To this end, a basic CCAPM is extended and imported consumables are included in Epstein and Zin’s recursive utility function. The research sample encompasses eight portfolios and monthly data from 2003 to 2014. The pricing model parameters are estimated using Euler's equations and Hansen and Singleton’s generalized method of moments (GMM). An estimation of the parameters of Euler's equations indicates the risk aversion and tolerance of economic factors, low elasticity of substitution for domestic consumables and imported consumables, and high elasticity of intertemporal substitution. In the next step, using Euler’s linearized equations as asset pricing model and Fama and Macbeth's two-step regression method, the effects of exchange rate risk premium, inflation, market efficiency, and consumption growth on return premium on assets are investigated. The results indicates the positive impact of the exchange rate risk premium, inflation, and market returns on the return premium on assets.