Foreign Exchange Volatility Is Priced in Equities

Abstract

"This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors that occur as a result of the purchase of options on foreign exchange futures. Foreign exchange volatility does influence stock returns, however. The volatility of the JPY/USD exchange rate predicts the time series of stock returns and is priced in the cross-section of stock returns." Copyright (c) 2008 Financial Management Association International..

Size, Value and Business Cycle Variables. The Three-Factor Model and Future Economic Growth: Evidence from an Emerging Market

“…Success of the Fama-French three factor model is, basically, a divergence in CAPM and emerged as a most popular explanation for the ongoing argument on asset pricing. However, several studies in the financial literature (e.g., Groenewold Fraser 1997;Beltratti and Tria 2002;Drew and Veeraraghan 2002;Mirza and Shahid 2008;Guo et al 2008;Lischewski and Voronkova 2012;Cakici et al 2013;Minović and Živković 2014;Baek and Bilson 2015;Boamah 2015;Ceylan et al 2015;Zaremba and Konieczka 2015;Elgammal et al 2016;Chung et al 2016; Xie and Qu 2016; Kubota and Takehara 2017) attribute mixed evidence regarding the existence, significance, augmented versions and time varying behavior of the risk premiums and the three-factor model in the stock markets of USA, Europe, Australia, Asia and Africa by applying various models and portfolio construction methodologies. Daniel and Titman (1997) examined the Fama and French (1993) and demonstrated that size and book-to-market factors are highly correlated with the average stocks returns but there is no separate distress and most of the co-movement of the value stocks is not due to distressed stocks being exposed to a unique distress factor.…”

Price Discovery of Internationally Cross‐listed Stocks During the 2008 Financial Crisis

“…The TRP estimation is closely related to the treatments of exchange rate effects in derivations of conditional information shares by Grammig, Melvin, and Schlag () and Frijns, Gilbert, and Tourani‐Rad (). Also, Guo, Neely, and Higbee () show that exchange rate volatility is priced in the cross‐section of stock returns. They find that stocks with higher sensitivity to changes in implied volatility in exchange rates have lower expected returns.…”

Currency Risk in Global Equity Markets: Determinants, Risk, and Predictability

“…Notably, a number of papers have suggested that currency values have implications for firm stock returns, beginning with Dumas and Solnik (1995). Many have concluded that currency risk matters in determining stock returns (e.g., Black, 1989;Guo, Neely, Higbee, 2008), whereas others have found no such effect (e.g., Jorion, 1991;Dominguez and Tesar, 2006), or a limited effect (Griffin and Stulz, 2001). I add to this body of knowledge by showing how dollar risk is a priced factor, relevant to a surprisingly diverse array of countries.…”

“…The question of currency risk is important, because much debate still lingers about its existence, direction, and magnitude (e.g., Dominguez et al, 2006;Guo et al, 2008). More sophisticated theories have come into play that have either had a macroeconomic focus (e.g., Lustig et al 2014), or a more firm fundamental one (e.g., Kolari et al, 2008;Wei and Starks, 2013).…”