Asymmetric Currency Exposure and Currency Risk Pricing
International Review of Financial Analysis, Volume 17, Issue 4, Pages 647-663, September 2008.
Posted: 28 Feb 2021
Date Written: September 2, 2008
Whether stock returns are linked to currency movements and whether currency risk is priced in a domestic context are less conclusive and thus still subject to a great debate. Based on a different approach, this paper attempts to provide new empirical evidence on these two inter-related issues, which are critical to investors and corporate risk management. In particular, this paper not only explores the possibility of asymmetric currency exposure that may explain why prior studies, which focus exclusively on linear exposure, have difficulty in detecting it, but also tests whether this asymmetric currency exposure is priced. The results show strong evidence of asymmetric currency exposure and currency risk pricing, suggesting that both asymmetry and conditional heteroskedasticity play important roles in testing currency exposure and its price.
Keywords: Time-varying currency risk premium, Asymmetric currency exposure, Multivariate GARCH-M
JEL Classification: C32, G12
Suggested Citation: Suggested Citation