Some Insights into the Foreign Exchange Pricing Puzzle: Evidence from a Small Open Economy

42 Pages Posted: 1 Feb 2004

See all articles by Jianguo Chen

Jianguo Chen

Massey University - School of Economics and Finance

Michael Naylor

Massey University - School of Economics and Finance

Xingshen Lu

affiliation not provided to SSRN

Abstract

One of the great puzzles of international finance research has been the surprising finding that firm value is only mildly sensitive, if at all, to exchange rate fluctuations. This runs against the conclusions of the standard net discounted cash flow theory. In this article we examine this puzzle, and provide some insights by looking at whether the result is peculiar to large economies like the US, using improved methodology including a residual regression model, the use of individual firm data, and looking at the effect of different exchange rates. We do find clear evidence that exchange rate movements affect the value of listed firms. We also find that the direction and degree of sensitivity is dependant on the currency used.

Keywords: Exchange rate risk, Asset pricing, New Zealand stock market, Small & Open economy

JEL Classification: G12

Suggested Citation

Chen, Jianguo and Naylor, Michael and Lu, Xingshen, Some Insights into the Foreign Exchange Pricing Puzzle: Evidence from a Small Open Economy. Pacific-Basin Finance Journal, Vol. 12, pp. 41-64, 2004. Available at SSRN: https://ssrn.com/abstract=491422

Jianguo Chen

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Michael Naylor (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Xingshen Lu

affiliation not provided to SSRN

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