Foreign Exchange Exposure and Pricing in the Australian Equities Market: A Fama and French Framework

34 Pages Posted: 18 Jun 2002

See all articles by Amalia Di Iorio

Amalia Di Iorio

La Trobe Business School

Robert W. Faff

University of Queensland

Abstract

This study analyses the foreign exchange exposure of the Australian equities market to movements in the Australian dollar/Japanese yen (AUDJPY) and the Australian dollar/US dollar (AUDUSD) in a Fama-French framework using both daily data and monthly data. In addition to simply investigating exchange rate exposure by augmenting the Fama-French three factor model with the exchange rate factor, this paper examines the nature of exchange rate exposure in a number of different settings. Specifically, it explores (i) the possibility of an asymmetric response; (ii) its intertemporal stability over the sample period; (iii) the effect of increasing return measurement intervals; and (iv) the pricing of exchange rate risk in the Australian equities market. This study also investigates a possible lagged response to fluctuations in the exchange rate factor. Although the results are mixed, a summary of the outcome of our investigation is as follows: (i) daily data provides stronger results than monthly data; (ii) there is some evidence of a lagged response; (iii) implementing the AUDUSD exchange rate factor provides stronger results in the basic multi-factor and the stability analyses; (iv) there is some evidence of a weak asymmetric response, intertemporal sensitivity and pricing of exchange rate risk in the Australian equities market; (v) there is evidence that exchange rate exposure increases as the return intervals increase; (vi) the Fama-French book-to-market factor and size factor are strongly significant throughout each of the analyses, hence supporting the Fama-French framework.

Keywords: Exchange Rate Risk, Australian Stock Market, Fama and French Factors

JEL Classification: G12

Suggested Citation

Di Iorio, Amalia and Faff, Robert W., Foreign Exchange Exposure and Pricing in the Australian Equities Market: A Fama and French Framework. EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314369 or http://dx.doi.org/10.2139/ssrn.314369

Amalia Di Iorio (Contact Author)

La Trobe Business School ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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