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Foreign exchange risk and the term-structure of industry costs of equity

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  • Krapl, Alain
  • Giaccotto, Carmelo

Abstract

This paper makes two contributions to the literature. First, we build on the methodology of Ang and Liu (2004) to model the cost of capital term-structure for firms subject to foreign exchange (FX) risk. We emphasize the role of time-varying parameters such as FX risk and factor loadings. Second, we estimate the term-structure for 39 U.S. industries. We find that: 1) FX exposure changes the position and shape of the term-structures; 2) The average FX risk premium is 2.29% for cash flows with short-term maturity, but declines as maturity increases; 3) The pricing error from ignoring the term-structure is smaller than the error resulting from the omission of the FX risk component.

Suggested Citation

  • Krapl, Alain & Giaccotto, Carmelo, 2015. "Foreign exchange risk and the term-structure of industry costs of equity," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 71-88.
    • Handle: RePEc:eee:jimfin:v:51:y:2015:i:c:p:71-88
    DOI: 10.1016/j.jimonfin.2014.11.001
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    More about this item

    Keywords

    Cost of capital term-structure; Foreign currency risk premium; Global market risk premium; Industry Cost of capital; Global CAPM; International CAPM;
    All these keywords.

    JEL classification:

    • 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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