The Foreign Exchange Risk Premium in the Cross-Section of Stock Returns: International Evidence

60 Pages Posted: 12 Dec 2019 Last revised: 4 Jan 2020

See all articles by Alain A. Krapl

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance

Armin Varmaz

University of Applied Sciences Bremen

Date Written: January 03, 2020

Abstract

Using the framework of the International Capital Asset Pricing model (ICAPM), we explore two central topics associated with equity foreign exchange (FX) risk premia. First, we estimate ICAPM-consistent FX risk premia for a large cross-section of firms. Second, we study the diversifiability of FX risk. Using equity data from six major financial markets, we find support for FX risk being a priced factor in the unconditional setting. Empirical estimates of FX risk premia are negative and economically meaningful for firms in most of the sample markets. Further, we observe that FX risk does not appear to be fully diversifiable from four major currency perspectives.

Keywords: International Capital Asset Pricing Model, Diversifiability of FX exposure, Pricing of FX exposure, Foreign Exchange (FX) risk premium

JEL Classification: G32, G39, G15, F39

Suggested Citation

Krapl, Alain A. and Varmaz, Armin, The Foreign Exchange Risk Premium in the Cross-Section of Stock Returns: International Evidence (January 03, 2020). Available at SSRN: https://ssrn.com/abstract=3493302 or http://dx.doi.org/10.2139/ssrn.3493302

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance ( email )

Haile/US Bank College of Business
Nunn Drive
Highland Heights, KY 41099
United States

Armin Varmaz (Contact Author)

University of Applied Sciences Bremen ( email )

Neustadtswall 30
Bremen, 28199
Germany

HOME PAGE: http://www.hs-bremen.de/internet/de/hsb/struktur/mitarbeiter/varmaz/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
15
Abstract Views
85
PlumX Metrics