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Foreign exchange volatility is priced in equities

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  • Hui Guo
  • Christopher J. Neely
  • Jason Higbee

Abstract

This paper finds that standard asset pricing models fail to explain the significantly positive delta hedging errors from writing options on foreign exchange futures. Foreign exchange volatility does influence stock returns, however. The volatility of the JPY/USD exchange rate predicts the time series of stock returns and is priced in the cross-section of stock returns. Foreign exchange volatility risk might be priced because of its relation to foreign exchange level risk. ; Earlier title: Is foreign exchange delta hedging risk priced?

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-029.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2004-029

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Keywords: Foreign exchange ; Assets (Accounting) ; Prices;

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Citations

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Cited by:
  1. Christoffersen, Peter & Mazzotta, Stefano, 2004. "The informational content of over-the-counter currency options," Working Paper Series 0366, European Central Bank.
  2. Torben G. Andersen & Luca Benzoni, 2008. "Realized volatility," Working Paper Series WP-08-14, Federal Reserve Bank of Chicago.
  3. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.
  4. Aidan Corcoran, 2010. "Global Funding Liquidity, Equity Returns and Crash Risk: Implications for Monetary Policy," The Institute for International Integration Studies Discussion Paper Series iiisdp318, IIIS, revised Feb 2010.

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