Exchange-Rate Exposure, Stock Returns and the Pricing of Currency Risk in Japan

Posted: 20 Nov 1996

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Patricia H. Hall

Central Connecticut State University

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: Undated

Abstract

Previous work on the exposure of firms to exchange-rate risk has primarily focused on U.S. firms and, surprisingly, found stock returns were not significantly affected by exchange-rate fluctuations. In this paper we conduct a comprehensive analysis that examines the relation between Japanese stock returns and unanticipated exchange-rate changes. In addition, we investigate whether exchange-rate risk is priced in the equity market of Japan using a conditional testing procedure that allows risk premia to change through time in response to changes in macroeconomic conditions. We find a reliable relation between stock returns and unanticipated yen fluctuations. The exposure effect on multinationals and high-exporting firms, however, is found to be greater compared to low-exporting and domestic firms. Lagged-exchange rate changes on firm value are found to be statistically insignificant and without any predictive power for future stock returns based on the asset pricing tests. The co-movement between stock returns and the value of the yen is found to be positively associated with the degree of firm's foreign involvement. Our multi-period conditional asset pricing tests show that the foreign exchange-rate risk premium is a significant component of Japanese stock returns. Specifically, the results suggest that currency- risk exposure commands significant risk premium for multinationals and high-exporting Japanese firms. Finally, Japanese stock returns are found to be related to the relative distress, size and market factors, as shown by Fama and French (1995) for U.S. stocks above and beyond the covariation by the foreign currency factor.

JEL Classification: G15

Suggested Citation

Doukas, John A. and Hall, Patricia H. and Lang, Hsien Ping Larry, Exchange-Rate Exposure, Stock Returns and the Pricing of Currency Risk in Japan (Undated). Available at SSRN: https://ssrn.com/abstract=7922

John A. Doukas

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)

HOME PAGE: http://www.efmaefm.org/0DOUKAS/doukas.php

Patricia H. Hall (Contact Author)

Central Connecticut State University ( email )

1615 Stanley Street
New Britian, CT 06050
United States
860-832-3262 (Phone)
860-832-3219 (Fax)

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

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