The notion of exchange risk premium has derived from the study to test the efficiency of foreign exchange market. By replacing the risk-neutral hypothesis to the risk-averted hypothesis, exchange risk premium is considered as compensation for the market participants in return for bearing the risk of future spot exchange rate uncertainty. Under this hypothesis, forward rate has a systematic difference with the future spot rate. On the other hand, exchange risk premium is derived from developing the portfolio balance model of the determination of the equilibrium exchange rate. The portfolio balance model postulates that domestic and foreign bonds are imperfect substitutes, such that ‘International Fisher Effect(IFE)’ does not hold. Therefore, exchange risk premium is related to the relative share of that country’s assets which make up the overall portfolio. That is, exchange risk premium is the value subtracting the differences of nominal interest rate between domestic and foreign bonds from exchange rate change. Considering interest rate parity theorem, two different approach on exchange risk premium explained above produce the same value. Three approach have been developed to explain exchange risk premium. First, there is the international portfolio balance approach proposed by Dornbusch(1983) and Frankel (1982, 1986). This approach has its roots in the imperfect bond substitution and recognizes exchange risk premium as a compensation for holding a greater share of a particular country’s assets. However, testing the model in several major foreign exchange markets found that the risk-neutral hypothesis cannot be rejected by the data. The second approach was to invoke a time-varying parameter methodology. Fama(1984), for example, tries to explain time varying risk premium in the foreign exchange market. However, no concrete evidence has been given that a significant relationship exists between exchange risk premium and risk factors and the results was limited to relying on econometrical approach. The third approach, due to Robicheck and Eaker(1978), Giovannini and Jorion(1987) and most recently, Chiang(1991) has been to relate the foreign exchange market risk premium to the stock market excess returns. This approach assumes that the foreign exchange markets and equity markets are interrelated such that the risk premium identified in one market may be related to the risk or excess return in another. For example, Chiang(1991) used International Asset Parity(IAP) Condition to theoretically derive the equation explaining exchange risk premium with domestic and foreign equity risk premia. This paper addresses whether domestic and foreign equity risk premia, based on the IAP equation, are the decision factors to explain the exchange risk premium. and how the foreign exchange market risk premium and the stock market risk premia are interrelated. Behavioral relationships between exchange risk premium and equity risk premia and additional empirical analysis on the validity of IAP will be discussed. First of all, APT model was applied to IAP equation in place of the equity return to explain exchange risk premium with domestic and foreign equity risk premia. Efforts have been made to test whether the exchange risk premium of the 5 developed countries(US, UK, Japan, Canada, Germany) can be actually explained by domestic and foreign equity risk premia. As a result of the empirical test using factor analysis and regression analysis, exchange risk premium is explained by several domestic and foreign equity risk premia, which are statistically significant. Additional results about exchange risk premium revealed from the test were, firstly, the domestic and foreign equity risk premia do not always influence exchange risk premium simultaneously. Secondly, each domestic equity risk premium that is statistically significant displays identical sign as the domestic currency dominated exchange risk premia in all case. A further study on the validity of International Asset Parity reveals that each equity risk premium in one country is sensitive to the domestic currency dominated forward premium of the other four countries. As a result, forward premium variables remain as the independent variables explaining the equity risk premia, and this evidence indirectly supports the validity of the model derived from this paper.