where i is a "rm index, j a country market index, t a two-week period time index,
r
m,jt is a domestic market index, and r
US,t is the U.S. market return. The rate of
change in the exchange rate per U.S. dollar is e
jt.
The regression speci"ed in Eq. (6) is similar to classical asset pricing equations.
We do not pursue this asset pricing interpretation of Eq. (6) because we
view the present paper as an application of Grossman's (1976) and Roll's (1988)
approach to information capitalization, and not as a re"nement or critique of
any asset pricing model. Our emphasis is on the type of information that enters
stocks prices, not on any tradeo! between risk and return.
We include the U.S. stock market return in Eq. (6) because most economies
are at least partially open to foreign capital. The expression r
US,t
#e
jt translates
U.S. stock market returns into local currency units. We use biweekly returns to
overcome thin trading problems, which arise when securities are traded infrequently.
These returns are compounded from daily total returns. For stock
markets in the Far East, we lag U.S. market returns by one day to account for
time zone di!erences. Thus, if the biweekly stock return in Japan used data from
May 7, 1995 to May 21, 1995, the contemporaneous U.S. market return uses
data from May 6, 1995 to May 20, 1995. When we calculate Eq. (6) using U.S.
data, we set b
2,i to zero.