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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 negative delta hedging errors that occur as a result of the purchase of 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." Copyright (c) 2008 Financial Management Association International..

Suggested Citation

  • Hui Guo & Christopher J. Neely & Jason Higbee, 2008. "Foreign Exchange Volatility Is Priced in Equities," Financial Management, Financial Management Association International, vol. 37(4), pages 769-790, December.
  • Handle: RePEc:bla:finmgt:v:37:y:2008:i:4:p:769-790
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    References listed on IDEAS

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    Cited by:

    1. Christoffersen, Peter & Mazzotta, Stefano, 2004. "The informational content of over-the-counter currency options," Working Paper Series 366, European Central Bank.
    2. repec:gam:jecomi:v:6:y:2018:i:1:p:14-:d:134024 is not listed on IDEAS
    3. 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.
    4. 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.
    5. Brennan, Michael J. & Xia, Yihong, 2004. "International Capital Markets and Foreign Exchange Risk," University of California at Los Angeles, Anderson Graduate School of Management qt53z0s29k, Anderson Graduate School of Management, UCLA.
    6. Jimmy Lockwood & Larry Lockwood & Sie Ting Lau, 2016. "Lost In Translation: Which Stock Prices Bear The Burden To Adjust To Exchange Rates?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 39(3), pages 263-290, September.
    7. Hoda SELIM, "undated". "Fear of Floating and Exchange Rate Pass-Through to Inflation in Egypt," EcoMod2010 259600151, EcoMod.
    8. Suk Joon Byun & Dong Woo Rhee & Sol Kim, 2011. "Intraday volatility forecasting from implied volatility," International Journal of Managerial Finance, Emerald Group Publishing, vol. 7(1), pages 83-100, February.

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