Pricing Dollar Strength Risk
67 Pages Posted: 27 Sep 2016 Last revised: 15 Aug 2017
Date Written: August 5, 2017
The relative strength of the U.S. dollar does not explain the cross-section of expected returns. We find, however, that signed sensitivity of individual firms’ returns to moves in dollar strength matters for asset pricing. A portfolio that goes long high-dollar-sensitivity stocks and short low-dollar-sensitivity stocks earns a multi-factor alpha of 3%-7% per year. Sorting on dollar sensitivity captures firm fundamentals - in particular fraction of revenue from abroad. Dollar sensitivity has implications for profitability and fundamental momentum, as well as the relationship between momentum strategies across countries.
Keywords: factor models, global risk, momentum, exposure
JEL Classification: G12, G15
Suggested Citation: Suggested Citation