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Persistent exchange-rate movements and stock returns

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  • Du, Ding

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:intfin:v:28:y:2014:i:c:p:36-53
    DOI: 10.1016/j.intfin.2013.10.007
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    3. Nikolaos Sariannidis & Grigoris Giannarakis & Eleni Zafeiriou & Ioannis Billias, 2016. "The Effect of Crude Oil Price Moments on Socially Responsible Firms in Eurozone," International Journal of Energy Economics and Policy, Econjournals, vol. 6(2), pages 356-363.
    4. 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.
    5. Ding Du & Xiaobing Zhao, 2017. "Financial investor sentiment and the boom/bust in oil prices during 2003–2008," Review of Quantitative Finance and Accounting, Springer, vol. 48(2), pages 331-361, February.
    6. Du, Ding & Hu, Ou & Wu, Hong, 2014. "Emerging market currency exposure: Taiwan," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 47-61.

    More about this item

    Keywords

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

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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