Can Foreign Exchange Risk Hedge Other Sources of Risk? A Multifactor Analysis

22 Pages Posted: 27 May 2004

See all articles by James Ross McCown

James Ross McCown

University of Oklahoma - Division of Finance; Toltec Group

Miguel Villanueva

Crowninshield Financial Research; Boston University - MET

Date Written: February 3, 2005

Abstract

An investor who assumes foreign exchange risk by making an unhedged foreign investment can use it to hedge other sources of risk. Comparisons of the relations between the hedged and unhedged returns for 19 developed country stock indexes and risk factors faced by a U.S. investor show significant differences for the default spread, industrial production, and term spread. This can be the case even when the U.S. dollar is appreciating against the foreign currencies. The joint moments between the foreign exchange fluctuations, underlying stock returns, and the risk factors are also important.

Keywords: International Asset Pricing, Exchange Rates,Foreign Exchange Risk

JEL Classification: F31, G12

Suggested Citation

McCown, James Ross and Villanueva, Miguel, Can Foreign Exchange Risk Hedge Other Sources of Risk? A Multifactor Analysis (February 3, 2005). Available at SSRN: https://ssrn.com/abstract=550641 or http://dx.doi.org/10.2139/ssrn.550641

James Ross McCown (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

Toltec Group ( email )

Oklahoma City, OK
United States

Miguel Villanueva

Crowninshield Financial Research ( email )

56 Harvard St
Brookline, MA 02445
United States
7812374800 (Phone)

Boston University - MET ( email )

United States

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