Foreign exchange volatility and stock returns

Ding Du, Ou Hu

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

This paper explores whether foreign exchange volatility is a priced factor in the US stock market. Our investigation is motivated by a number of empirical as well as theoretical considerations. Empirically, Menkhoff et al. (2012) find that foreign exchange volatility is a pervasive factor across a variety of test assets. Theoretically, Shapiro (1974), Dumas (1978), and Levi (1990) imply that foreign exchange volatility can influence firms' cash flow volatility therefore the discount rate. In terms of empirical implementation, we employ the cross-sectional regression methodology of Fama and MacBeth (1973) as well as the time-series regression approach of Fama and French (1996). For robustness, we also use the mimicking portfolio approach of Fama and French (1993). We find that foreign exchange volatility has no power to explain either the time-series or the cross-section of stock returns, which calls for more research on foreign exchange risk. Bartov et al. (1996) and Adrian and Rosenberg (2008) suggest an alternative and maybe promising direction.

Original languageEnglish (US)
Pages (from-to)1202-1216
Number of pages15
JournalJournal of International Financial Markets, Institutions and Money
Volume22
Issue number5
DOIs
StatePublished - Dec 2012

Fingerprint

Foreign exchange
Stock returns
Factors
Robustness
Foreign exchange risk
Assets
Cross-section of stock returns
Cash flow volatility
Methodology
Cross-sectional regression
Discount rate
Stock market

Keywords

  • Exchange rate risk factor
  • Foreign exchange volatility
  • Mimicking portfolios

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Foreign exchange volatility and stock returns. / Du, Ding; Hu, Ou.

In: Journal of International Financial Markets, Institutions and Money, Vol. 22, No. 5, 12.2012, p. 1202-1216.

Research output: Contribution to journalArticle

@article{41ec0998a28b4b15af038fb3cdb3aefd,
title = "Foreign exchange volatility and stock returns",
abstract = "This paper explores whether foreign exchange volatility is a priced factor in the US stock market. Our investigation is motivated by a number of empirical as well as theoretical considerations. Empirically, Menkhoff et al. (2012) find that foreign exchange volatility is a pervasive factor across a variety of test assets. Theoretically, Shapiro (1974), Dumas (1978), and Levi (1990) imply that foreign exchange volatility can influence firms' cash flow volatility therefore the discount rate. In terms of empirical implementation, we employ the cross-sectional regression methodology of Fama and MacBeth (1973) as well as the time-series regression approach of Fama and French (1996). For robustness, we also use the mimicking portfolio approach of Fama and French (1993). We find that foreign exchange volatility has no power to explain either the time-series or the cross-section of stock returns, which calls for more research on foreign exchange risk. Bartov et al. (1996) and Adrian and Rosenberg (2008) suggest an alternative and maybe promising direction.",
keywords = "Exchange rate risk factor, Foreign exchange volatility, Mimicking portfolios",
author = "Ding Du and Ou Hu",
year = "2012",
month = "12",
doi = "10.1016/j.intfin.2012.07.001",
language = "English (US)",
volume = "22",
pages = "1202--1216",
journal = "Journal of International Financial Markets, Institutions and Money",
issn = "1042-4431",
publisher = "Elsevier BV",
number = "5",

}

TY - JOUR

T1 - Foreign exchange volatility and stock returns

AU - Du, Ding

AU - Hu, Ou

PY - 2012/12

Y1 - 2012/12

N2 - This paper explores whether foreign exchange volatility is a priced factor in the US stock market. Our investigation is motivated by a number of empirical as well as theoretical considerations. Empirically, Menkhoff et al. (2012) find that foreign exchange volatility is a pervasive factor across a variety of test assets. Theoretically, Shapiro (1974), Dumas (1978), and Levi (1990) imply that foreign exchange volatility can influence firms' cash flow volatility therefore the discount rate. In terms of empirical implementation, we employ the cross-sectional regression methodology of Fama and MacBeth (1973) as well as the time-series regression approach of Fama and French (1996). For robustness, we also use the mimicking portfolio approach of Fama and French (1993). We find that foreign exchange volatility has no power to explain either the time-series or the cross-section of stock returns, which calls for more research on foreign exchange risk. Bartov et al. (1996) and Adrian and Rosenberg (2008) suggest an alternative and maybe promising direction.

AB - This paper explores whether foreign exchange volatility is a priced factor in the US stock market. Our investigation is motivated by a number of empirical as well as theoretical considerations. Empirically, Menkhoff et al. (2012) find that foreign exchange volatility is a pervasive factor across a variety of test assets. Theoretically, Shapiro (1974), Dumas (1978), and Levi (1990) imply that foreign exchange volatility can influence firms' cash flow volatility therefore the discount rate. In terms of empirical implementation, we employ the cross-sectional regression methodology of Fama and MacBeth (1973) as well as the time-series regression approach of Fama and French (1996). For robustness, we also use the mimicking portfolio approach of Fama and French (1993). We find that foreign exchange volatility has no power to explain either the time-series or the cross-section of stock returns, which calls for more research on foreign exchange risk. Bartov et al. (1996) and Adrian and Rosenberg (2008) suggest an alternative and maybe promising direction.

KW - Exchange rate risk factor

KW - Foreign exchange volatility

KW - Mimicking portfolios

UR - http://www.scopus.com/inward/record.url?scp=84864839736&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84864839736&partnerID=8YFLogxK

U2 - 10.1016/j.intfin.2012.07.001

DO - 10.1016/j.intfin.2012.07.001

M3 - Article

AN - SCOPUS:84864839736

VL - 22

SP - 1202

EP - 1216

JO - Journal of International Financial Markets, Institutions and Money

JF - Journal of International Financial Markets, Institutions and Money

SN - 1042-4431

IS - 5

ER -