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

58 Pages Posted: 12 Dec 2019 Last revised: 15 Jul 2021

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; School of International Business Bremen

Date Written: July 15, 2021

Abstract

Using the framework of the International Capital Asset Pricing Model, we estimate unconditional FX risk premiums for a large cross-section of firms from local currency perspectives. Further, we study the impact of potential FX risk diversifiability on FX risk premiums. Using equity data from nine major financial markets, we find support for FX risk being a contributing factor to stock return volatility in eight and a priced factor in four of the sample markets. Empirical estimates of FX risk premiums are economically meaningful, negative for U.S. and Swiss firms, and positive for Australian and Canadian firms.

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 (July 15, 2021). 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/

School of International Business Bremen ( email )

Werderstr. 73
Bremen, Bremen 28199
Germany

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