Foreign exchange volatility and stock returns

Du, Ding; Hu, Ou

doi:10.1016/j.intfin.2012.07.001

Cited by 15 publications

(5 citation statements)

References 49 publications

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“…To estimate I‐NEER risk exposure at the firm level, following Menkhoff et al () and Du and Hu (), we specify the model as follows:

S_{j, t} = β_{0} + β_{1} S_{m, t} + β_{2} X_{j, t} + ε_{j, t}, j = 1, 2, \dots, N; t = 1, 2, \dots, T,

…”

Section: Variables and Empirical Methodologymentioning

confidence: 99%

“…Following Menkhoff, Sarno, and Schmeling () and Du and Hu (), we then examine the (second‐moment) exchange rate risk exposure at the firm level and find that more than 20% of the sample firms are associated with significant foreign exchange rate exposure, which is much higher than the percentage in previous work (Bartram, ; Bartram et al, ; Dominguez & Tesar, ; Donnelly & Sheehy, ; Hutson & O'Driscoll, ; Kanagaraj & Sikarwar, ). Consistent with the existing literature, we find that firms' exchange rate exposure is higher for firms associated with larger size, higher market‐to‐book ratio, less liquidity, more foreign trade, less long‐term leverage, and higher market power.…”

Section: Introductionmentioning

confidence: 95%

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Exchange rate exposure: Evidence from China

Wang

Zhao

2019

Rev International Economics

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This paper examines exchange rate exposure using a sample of Chinese firms. To measure RMB exchange rate volatility and jump risk, we apply the autoregressive conditional jump intensity (ARJI) model to the industry‐specific nominal effective exchange rate (I‐NEER) for 13 Chinese manufacturing industries over the period 2001 to 2017, We find that exchange rate risks do affect firm value at the industry level, and the effect is more significant for the jump risks that are more difficult to hedge and in the sample period when hedge activities are less likely to occur. Our results suggest that the exposure puzzle could be a result of the endogeneity of operative and financial hedging. Firm‐level analysis finds that exchange rate risk affects firm value for more than 20% of Chinese firms, and a firm's exchange rate exposure varies with the firm's characteristics.

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“…To estimate I‐NEER risk exposure at the firm level, following Menkhoff et al () and Du and Hu (), we specify the model as follows:

S_{j, t} = β_{0} + β_{1} S_{m, t} + β_{2} X_{j, t} + ε_{j, t}, j = 1, 2, \dots, N; t = 1, 2, \dots, T,

…”

Section: Variables and Empirical Methodologymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 95%

Exchange rate exposure: Evidence from China

Wang

Zhao

2019

Rev International Economics

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“…We note, however, thatFraser and Pantzalis (2004) mention in a footnote that they find no difference in their results for FX rate effects when SMB and HML are incorporated in their model (see alsoBodnar and Wong, 2003) Du and Hu (2012). also report no difference in their results for FX rate volatility when the FFC pricing factors are included in their model.…”

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confidence: 85%

“…also report no difference in their results for FX rate volatility when the FFC pricing factors are included in their model. UnlikeFraser and Pantzalis (2004) andDu and Hu (2012), we employ bivariate GJR-GARCH-M methods where the conditional correlations are either held constant or allowed to vary. Our CAPMs also incorporate interest rate changes and we estimate two augmented CAPMs, one of which contains FFC pricing factors.…”

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confidence: 99%

Short-horizon excess returns and exchange rate and interest rate effects

Joseph

Lambertides

Savva

2015

Journal of International Financial Markets, Institutions and Mo

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We examine the effects of foreign exchange (FX) and interest rate changes on the excess returns of U.S. stocks, for short-horizons of 1 to 40 days. Our new evidence shows a tendency for the volatility of both excess returns and FX rate changes to be negatively related with FX rate and interest rate effects. Both the number of firms with significant FX rate and interest rate effects and the magnitude of their exposures increase with the length of the return horizon. Our finding seems inconsistent with the view that firms hedge effectively at short-return horizons. JEL: F3; G15Keywords: Exchange rate and interest rate effects; smooth transition function; bivariate GJR-GARCH-M; time-varying conditional correlations; Fama-French-Carhart (FFC) factors 2 1 Using a 5% significance level, Jorion (1990) finds that at most, 5.6% of the 287 non-financial U.S. firms in his sample are significantly impacted by FX rate changes whereas, Muller and Verschoor (2006a) find that 29% of the 935 non-financial U.S. firms in their sample are significantly impacted by FX rate changes. 2 He and Ng (1998) find that 26% of non-financial Japanese firms exhibit significant FX rate effects. Similarly, Prasad and Rajan (1995) find that 25% of U.S. industry portfolios exhibit significant FX rate effects.3 frequency compared to prior work. We focus on short-horizon returns since it is often argued that firms are very effective in managing and hedging their short-term exposures (see Booth, 1996;Chow et al., 1997aChow et al., , 1997b. We assume that our return horizons fall within the time period suggested by prior studies. 3 The idea that firms have good hedging skills is often used to explain why one-period returns provide very weak evidence of FX rate and interest rate effects. This explanation seems reasonable since Fortune 500 firms hedge their cash flow exposures over a two-to-four-quarter horizon (see Dolde, 1993), and up to 82% of U.S. firms hedge for an initial maturity of 90 days or less (see Bodnar et al., 1998, pp. 75-77). So the explanation sits well when linked with risk management practice. Correspondingly, long-horizon returns appear to provide stronger evidence of exposure effects relative to one-period returns, due to the increased difficulty firms have in capturing long-term economic exposure (see Booth, 1996). Of course, CAPM estimates of exposure represent residual risk to both firms and investors.We also examine the conditional correlations obtained from the volatility of excess stock returns and the volatility of FX rate changes. This is because the conditional volatility of excess returns and FX rate changes can affect the relation between excess returns and FX rate changes. There is growing support for this view. Bartov et al. (1996), for example, suggest that the volatility of stock returns appears to increase with the volatility of FX rate changes. We statistically test this view using two separate bivariate (asymmetric) GJR-GARCH(1,1) in mean, hereafter, GJR-GARCH-M, that incorporates CAPM. 4 Volatility spillover can a...

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“…Du and Hu use US data from 1973 to 2010 and estimated CAPM and Carhart Four Factor Model with a currency volatility risk factor. The authors failed to obtain a conclusion of a significant currency risk premium [39]. An interesting approach was introduced in the study by Armstrong, Knif, Kolari and Pynnonen.…”

Section: Higher School Of Economicsmentioning

confidence: 99%

The Impact of Currency Risk on Firm’s Value in Emerging Countries

Kuchin¹,

Elkina²,

Dranev³

2019

КФ

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This study is dedicated to estimating the impact of currency risk on the cost of equity in Brazil, Russia, India and South Africa. Our contribution to the literature is that we obtain further evidence on pricing of exchange rate risk in developing countries which for now is quite scarce. These motivates our research which is dedicated to BRICS capital markets with Chinese stock market excluded since it is heavily regulated. The aim of the research is to determine whether in emerging countries stock markets currency risk is a significant factor that influence cost of equity capital of a company. Changes in the value of exchange rate can impact cash flows of a firm and their riskiness, hence, the value of the company. In our research we will discuss the influence of exchange rate movements on the value of the firm through their impact on the cost of equity. Specifically, we investigate whether companies that report substantial currency gains or losses have to pay a higher required return on equity. Furthermore, in this study we take an attempt to estimate currency risk premia for exposure to appreciation and depreciation of currency separately and identify possible differences. For each country three models that extend Fama-French Three Factor Model by incorporating currency risk are estimated. We used equal-weighted portfolio approach to construction currency risk factors. They are estimated using information about the ratio of currency gains to sales or the magnitude of covariation between equity returns and exchange rate changes. In the second case appreciation and depreciation of domestic currency against US dollar is considered separately. Results indicate that in Russia firms which report substantial currency losses pay a positive risk premium, while in Brazil, India and South Africa companies with significantly positive or negative currency gains pay a lower required return on equity than firms with almost zero currency gains. Finally, we are trying to explain estimation results using sectoral breakdown of product exports in each country of data sample.

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Foreign exchange volatility and stock returns

Cited by 15 publications

References 49 publications

Exchange rate exposure: Evidence from China

Exchange rate exposure: Evidence from China

Short-horizon excess returns and exchange rate and interest rate effects

The Impact of Currency Risk on Firm’s Value in Emerging Countries

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