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
Date Written: January 03, 2020
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: Suggested Citation