Foreign Exchange Exposure, Risk and the Japan Market
Posted: 25 Jun 1998
Date Written: May 1996
This paper presents a comprehensive empirical examination of the foreign exposure effect on Japanese corporations and sectors. We provide compelling evidence that, after controlling for marketwide movements, the exposure effect on Japanese corporations' stock returns is both statistically and economically significant. Based on a wide array of about 1200 Japanese firms and a group of 23 different Japanese industries in our sample, we find that Japanese stock returns on average are negatively correlated with contemporaneous exchange rate changes, but are virtually uncorrelated with lagged exchange rate fluctuations. The results are robust not only across exporting and non-exporting firms and industries, but also across sample periods. Exposure effects are also found to vary through time. We further show that both the market and currency risks are priced in the Japan stock market. Our results provide strong evidence that their conditional covariance risks are time-varying.
JEL Classification: F23, F31, G12
Suggested Citation: Suggested Citation