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Persistent exchange-rate movements and stock returns

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  • Du, Ding
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    Abstract

    We hypothesize that persistent exchange-rate movements are a distress risk and a state variable in the Merton (1973) sense. To test our hypothesis, we use the tracking portfolio approach of Lamont (2001) to capture news about future persistent exchange-rate movements. We find empirical evidence that supports our hypothesis, which has important implications for both international finance and empirical asset pricing. For international finance, our evidence provides an alternative explanation for the exposure puzzle and suggests researchers focus on persistent, instead of contemporaneous, exchange-rate movements. For empirical asset pricing, our findings imply a fresh and plausible perspective of exchange-rate risk, a state variable underlying the Fama–French factors.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 28 (2014)
    Issue (Month): C ()
    Pages: 36-53

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    Handle: RePEc:eee:intfin:v:28:y:2014:i:c:p:36-53

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Persistent exchange-rate movements; Distress risk; Tracking portfolio; Stock returns;

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