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Exchange rate risk in the US stock market

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  • Du, Ding
  • Hu, Ou

Abstract

Kolari et al. (2008) show that exchange rate risk measured by contemporaneous exchange rate changes is priced in the US stock market. However, by construction, their exchange rate risk factor has a strong correlation with the size factor, and their exchange rate sensitivity portfolios have a strong factor structure. To test whether their results are spurious, we carry out two sets of tests. The first set is motivated by Lewellen et al. (2010), where the second set is motivated by the voluminous literature which suggests that stock returns are heavy-tailed (e.g. Rachev and Mitnik, 2000). Different from Kolari et al. (2008), we find that exchange rate risk measured by contemporaneous exchange rate changes is not priced in the US stock market if we use industry portfolios which do not have a strong factor structure as the testing assets or if we use more robust methods to estimate firm-specific exchange rate sensitivity. Our findings therefore suggest that researchers take a new perspective on exchange rate risk.

Suggested Citation

  • Du, Ding & Hu, Ou, 2012. "Exchange rate risk in the US stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 137-150.
    • Handle: RePEc:eee:intfin:v:22:y:2012:i:1:p:137-150
    DOI: 10.1016/j.intfin.2011.08.003
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    1. Mahmut Erdogan, 2016. "Foreign Exchange Exposure and Hedging of Turkish Companies: Panel Data Evidence," International Business Research, Canadian Center of Science and Education, vol. 9(6), pages 44-52, June.
    2. Chen, Qi-an & Li, Huashi, 2023. "How does exchange rate elasticity of aggregate consumption adjust currency risk price in the stock market?," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 590-610.
    3. Bo Tang, 2015. "Exchange Rate Exposure of Chinese Firms at the Industry and Firm Level," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 592-607, August.
    4. Chiah, Mardy & Long, Huaigang & Zaremba, Adam & Umar, Zaghum, 2023. "Trade competitiveness and the aggregate returns in global stock markets," Journal of Economic Dynamics and Control, Elsevier, vol. 148(C).
    5. Du, Ding & Hu, Ou, 2012. "Foreign exchange volatility and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1202-1216.
    6. Vietha Devia Sagita Sumantri, 2020. "Analysis Factors Affecting Indonesia Stock Market (Case Studies on Consumer Goods Index)," ACTA VSFS, University of Finance and Administration, vol. 14(1), pages 10-23.
    7. Jairo Andrés Rendón, 2020. "Foreign exchange risk in stock returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 430-443, July.
    8. Juan Carlos Cuestas & Ying Sophie Huang & Bo Tang, 2016. "Does the Yuan's Overseas Expansion Increase the Currency Exposure of Chinese Financial Firms?," Working Papers 2016006, The University of Sheffield, Department of Economics.
    9. Spencer, Marilyn & Gevrek, Deniz & Chambers, Valrie & Bowden, Randall, 2015. "Labor Supply and Productivity Responses to Non-Salary Benefits: Do They Work? If So, at What Level Do They Work Best?," IZA Discussion Papers 9153, Institute of Labor Economics (IZA).
    10. Pincus, Karen V. & Stout, David E. & Sorensen, James E. & Stocks, Kevin D. & Lawson, Raef A., 2017. "Forces for change in higher education and implications for the accounting academy," Journal of Accounting Education, Elsevier, vol. 40(C), pages 1-18.
    11. Ding Du & Ou Hu, 2014. "Cash Flows, Currency Risk, And The Cost Of Capital," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 37(2), pages 139-158, June.
    12. Bessler, Wolfgang & Kurmann, Philipp & Nohel, Tom, 2015. "Time-varying systematic and idiosyncratic risk exposures of US bank holding companies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 35(C), pages 45-68.
    13. Cuestas, Juan Carlos & Huang, Ying Sophie & Tang, Bo, 2018. "Does internationalisation increase exchange rate exposure? -Evidence from Chinese financial firms," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 253-263.
    14. Kodongo, Odongo & Ojah, Kalu, 2014. "The conditional pricing of currency and inflation risks in Africa's equity markets," MPRA Paper 56100, University Library of Munich, Germany.
    15. Du, Ding, 2014. "Persistent exchange-rate movements and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 36-53.
    16. Du, Ding & Hu, Ou, 2014. "The long-run component of foreign exchange volatility and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 268-284.
    17. Du, Ding & Hu, Ou & Wu, Hong, 2014. "Emerging market currency exposure: Taiwan," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 47-61.
    18. Lestano, Lestano, 2015. "Asymmetric Exchange Rate Exposure in Indonesian Industry Sectors," MPRA Paper 64357, University Library of Munich, Germany.

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    More about this item

    Keywords

    Exchange rate risk; Contemporaneous exchange rate changes; Exchange rate risk factor; Currency exposure;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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