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The sensitivity of Canadian chartered banks to exchange rate risk is analyzed over the period 1988‐1995 through estimating the three‐factor asset pricing model (market, interest rate, and exchange rate). Results indicate that banks’ stock returns are sensitive to exchange rate risk and, mainly, to the US dollar relative to the Canadian dollar exchange rate. The sensitivity is, however, unstable over time. Moreover, there is an asymmetric response to exchange rate risk. Investors react more to a re‐evaluation of their portfolio after losses than to an appreciation after successive gains.

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