The pricing of common exchange rate factors in the U.S. equity market

Research output: Contribution to journalArticle

Abstract

We extend Lustig et al. (Rev Financ Stud 24:3731–3777, 2011) and Brusa et al. (The International CAPM Redux, 2014) by examining if the common exchange rate factors, the dollar and carry factors, are priced in the US equity market. Our results suggest that while the carry factor has incremental pricing information relative to the US market factor, the dollar factor (or the trade-weighted exchange rate index) is redundant. Our results have important theoretical as well as practical implications. Theoretically, we suggest that financial economists take an endogenous perspective of exchange rates. Practically, we suggest that practitioners incorporate in the carry factor to measure the exposure of exchange rate risk.

Original languageEnglish (US)
Pages (from-to)1-24
Number of pages24
JournalReview of Quantitative Finance and Accounting
DOIs
StateAccepted/In press - Jun 7 2017

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Keywords

  • Carry factor
  • Dollar factor
  • Exchange-rate exposure
  • U.S. equity market

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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