Exchange Risk Premia and Firm Characteristics

Abstract

This paper examines the presence and the determinants of exchange risk premia in stock returns using firm level data from South Korea. We conduct empirical asset pricing tests based on cross-sectional data sorted by firm characteristics such as firm size, liquidity, foreign ownership, and industry. Using alternative model specifications and exchange rate measures, our results support the hypothesis of a significant unconditional exchange risk premium in the Korean stock market at firm and industry levels. More specifically, we find that the exchange risk premium is directly related to firm liquidity and inversely related to firm size and foreign ownership.

Keywords: Exchange Rates; Exchange Risk Pricing; International Asset Pricing; Emerging Markets; Foreign Portfolio Investment; Risk Premium and Firm Characteristics

JEL Classification: F21; F31; G12, G15