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This article analyzes the impact of movements in the Australian dollar/Japanese yen (AUDJPY) and the Australian dollar/US dollar (AUDUSD) exchange rates on the returns of the Australian equities market. Specifically, this paper investigates the nature of exchange rate exposure across increasing return measurement intervals, enabling an examination of both its short-term and its long-term effect on stock returns. Consistent with previous literature, considerable evidence of long-term exchange rate exposure is found. Further, it is found that in the long-term the Australian equities market in general is exposed to fluctuations in the AUDJPY, while only some Australian industries are exposed to movements in the AUDUSD. Finally, convincing evidence in terms of the determinants of foreign exchange exposure is not found (JEL G12, G15).

This study examines the importance of idiosyncratic volatility in asset pricing for Australian stock returns from January 2002 to December 2010. Inspired by work from the early 1990s which found that portfolios constructed to mimic common risk factors explained significant variations in US stock returns, we construct an idiosyncratic volatility mimicking factor to explore the explanatory power of this factor in the Australian stock market. Our results indicate that (a) the idiosyncratic volatility mimicking factor is priced and positively related to the stock returns for the sample period, (b) the explanatory power of the idiosyncratic volatility mimicking factor remains robust in both time-series and cross-sectional analysis, and (c) big size stocks are systematically riskier than small size stocks.JEL Classification: G12