Foreign Exchange Rate Exposure and Risk Premium in International Investments: Evidence from American Depositary Receipts

Journal of Multinational Financial Management, Forthcoming

Posted: 15 Oct 2007

See all articles by Sung C. Bae

Sung C. Bae

Bowling Green State University - Department of Finance

Taek H. Kwon

Chonnam National University

Mingsheng Li

Bowling Green State University - College of Business Administration

Abstract

We examine how exchange rate changes affect the security returns and how economic and translation exposure components of exchange rate risk are priced across countries. Employing ADRs of four countries, we document four main findings. First, exchange rate changes are negatively related to underlying share returns of ADRs, but positively to ADR returns observed in the U.S. markets. Second, ADR returns are more closely related to local market returns than U.S. market returns, indicating that the local market environment plays a bigger role in determining ADR returns. Third, U.S. and local investors require different risk premiums for exchange rate risk present in ADR investments. Fourth, both the source (economic or translation exposure) and magnitude (high or low) of the exchange risk premium vary across countries. We obtain robust empirical findings for both country ADR portfolios and individual ADRs.

Keywords: foreign exchange rate exposure; foreign exchange risk premium; American Depositary Receipts

JEL Classification: F31; G15

Suggested Citation

Bae, Sung C. and Kwon, Taek H. and Li, Mingsheng, Foreign Exchange Rate Exposure and Risk Premium in International Investments: Evidence from American Depositary Receipts. Available at SSRN: https://ssrn.com/abstract=1021075

Sung C. Bae (Contact Author)

Bowling Green State University - Department of Finance ( email )

Business Administration 201
Bowling Green, OH 43403
United States
419-372-8714 (Phone)
419-372-2875 (Fax)

Taek H. Kwon

Chonnam National University ( email )

300 Yongbong-dong
Gwangju, Jeonnam
Korea, Republic of (South Korea)

Mingsheng Li

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

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