The Impact of Exchange Rate Changes on Asset Returns in the Framework of a Consumption Based Capital Asset Pricing Model

Along with increasing trade between countries, the changes in exchange rate is considered as one of the most important risk factors in the financial markets. Therefore, the aim of this study was to investigate the relationship between changes in exchange rates and asset returns in the theoretical and experimental framework of consumption based capital asset pricing model (CCAPM). For this purpose, we develop a basic CCAPM model by entry imported consumer goods in the recursive utility function of Epstein and Zin. The sample consisted of eight portfolios monthly data during the period 2003 to 2015. In the first stage, we used Euler equations and the generalized moments method (GMM) of Hansen and Singleton to estimate the parameters of the model, Estimating of the parameters of Euler equations indicate that economic agents are risk-averse and patient, the elasticity of substitution between domestic consumer goods and imported consumer goods is low and the inter-temporal elasticity of substitution is high. In the second stage, using by linear Euler equations as the asset pricing model and two-pass regression method of Fama and MacBeth, we investigated the impact of exchange risk premium, inflation, market returns and domestic consumption growth on the return premium. The results show that the exchange risk premium, inflation and market returns has a positive impact on return premium, This means that economic agents to accept more risk of these variables, apply to the more reward premium will be return on assets.