Currency Risk Premia in Global Stock Markets

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Currency Risk Premia in Global Stock Markets

Author Info

Shaun K. Roache
Matthew D. Merritt

Abstract

Large fundamental imbalances persist in the global economy, with potential exchange rate implications. This paper assesses whether exchange rate risk is priced across G-7 stock markets. Given the multitude of hedging instruments available, theory suggests that stock market investors should not be compensated for currency risk. However, data covering 33 industry portfolios across seven major stock markets suggest that not only is exchange rate risk priced in many markets, but that it is time-varying and sensitive to currency-specific shocks. With stock market investors typically exhibiting "home bias," this suggests that investors are using equity asset proxies to hedge the exchange rate risks to consumption.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/194.

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Length: 27 pages
Date of creation: 05 Sep 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/194

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NEP-ALL-2006-11-25 (All new papers)
NEP-UPT-2006-11-25 (Utility Models & Prospect Theory)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Bartram, Söhnke M. & Bodnar, Gordon M., 2006. "Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets," MPRA Paper 14018, University Library of Munich, Germany, revised 02 Nov 2008. [Downloadable!]
Shaun K. Roache, 2008. "Commodities and the Market Price of Risk," IMF Working Papers 08/221, International Monetary Fund. [Downloadable!]

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