Persistent exchange-rate movements and stock returns

Research output: Contribution to journalArticle

8 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)36-53
Number of pages18
JournalJournal of International Financial Markets, Institutions and Money
Volume28
Issue number1
DOIs
StatePublished - Jan 1 2014

Keywords

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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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