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Foreign exchange volatility is priced in equities

  • Hui Guo
  • Christopher J. Neely
  • Jason Higbee

This paper finds that standard asset pricing models fail to explain the significantly positive delta hedging errors from writing 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. Foreign exchange volatility risk might be priced because of its relation to foreign exchange level risk. ; Earlier title: Is foreign exchange delta hedging risk priced?

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-029.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2004-029
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