_____________________________________________________________ market risks _____________________________________________________________ iang e, Drexel University Street Philadelphia, PA 19104, USA gtc@drexel.edu Foreign exchange risk premiums and time-varying equity Thomas C. Ch Department of Financ 3141 Chestnut E-mail: chian uthor National Chung Hsing University Corresponding a Sheng-Yung Yang Department of Finance 250 Kuo Kuang Road Taichung 402, Taiwan R.O.C. E-mail: shengyang@nchu.edu.tw Abstract: This paper investigates the relationship between the e foreign exchanges and the conditional volatility of domestic and markets, based on a wide range of foreign-currency market data. U GARCH-in-mean process to generate con xcess returns of foreign equity tilizing a VAR- ditional variances, we find evidence to support the time varying, risk-premium hypothesis. Moreover, our evidence shows ys not only a clustering phenomenon, but also a significant spillover effect. Given the fact that the ng, investors and portfolio managers should continually assess this information and rebalance their Keywords: Exchange Rate Risk; Risk Premiums; Multivariate GARCH; Volatility tin Professor of national finance, global capital markets, and economic and business forecasting. His papers have been widely published in various areas in finance, economics, business, and time series analysis. His books include International Financial Markets and Sustainable Corporate Growth: A Model and Management Planning Tool. Sheng-Yung Yang is an assistant professor of finance at National Chung Hsing University. His areas of specialization are in international finance, international investment, and risk management. He has published in International Journal of Business and Review of Securities and Futures Markets, among others. that the volatility evolution of stock returns displa correlation structure across markets is significant and time varyi portfolios over time to achieve optimal diversification. JEL classification: C22; F31; G12 Biographical notes: Thomas C. Chiang is the Marshall M. Aus Finance at Drexel University. His expertise is in the areas of inter 1