Time Variation and Asymmetry in the World Price of Covariance Risk: The Implications for International Diversification

Abstract

The International Capital Asset Pricing Model measures countryrisk in terms of the conditional covariance of national returns withthe world return. Using impulse responses from a multivariate nonlinearmodel we provide evidence of time variation and asymmetry inthe measure of country risk. and the implied benefit to internationaldiversification. The evidence implies that the price of risk and the benefitsfrom diversification may differ in a statistically and economicallymeaningful fashion across bull and bear markets.