Asset Pricing and Foreign Exchange Risk
According to the International Capital Asset Pricing Model (ICAPM), the covariance of assets with foreign exchange currency returns should be a risk factor that must be priced when the purchasing power parity is violated. The goal of this study is to re-examine the relationship between stock returns...
| Main Authors: | , , |
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| Format: | Journal Article |
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J A I Press Inc.
2011
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| Online Access: | http://hdl.handle.net/20.500.11937/19280 |
| _version_ | 1848749987858481152 |
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| author | Apergis, Nicholas Artikis, P. Sorros, J. |
| author_facet | Apergis, Nicholas Artikis, P. Sorros, J. |
| author_sort | Apergis, Nicholas |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | According to the International Capital Asset Pricing Model (ICAPM), the covariance of assets with foreign exchange currency returns should be a risk factor that must be priced when the purchasing power parity is violated. The goal of this study is to re-examine the relationship between stock returns and foreign exchange risk. The novelties of this work are: (a) a data set that makes use of daily observations for the measurement of the foreign exchange exposure and volatility of the sample firms and (b) data from a Eurozone country. The methodology we make use in reference to the estimation of the sensitivity of each stock to exchange rate movements is that it allows regressing stock returns against factors controlling for market risk, size, value, momentum, foreign exchange exposure and foreign exchange volatility. Stocks are then classified according to their foreign exchange sensitivity portfolios and the return of a hedge (zero-investment) portfolio is calculated. Next, the abnormal returns of the hedge portfolio are regressed against the return of the factors. Finally, we construct a foreign exchange risk factor in such manner as to obtain a monotonic relation between foreign exchange risk and expected returns. The empirical findings show that the foreign exchange risk is priced in the cross section of the German stock returns over the period 2000–2008. Furthermore, they show that the relationship between returns and foreign exchange sensitivity is nonlinear, but it takes an inverse U-shape and that foreign exchange sensitivity is larger for small size firms and value stocks. |
| first_indexed | 2025-11-14T07:29:40Z |
| format | Journal Article |
| id | curtin-20.500.11937-19280 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T07:29:40Z |
| publishDate | 2011 |
| publisher | J A I Press Inc. |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-192802017-09-13T13:44:33Z Asset Pricing and Foreign Exchange Risk Apergis, Nicholas Artikis, P. Sorros, J. Momentum Fama–French Foreign exchange risk Asset pricing Market risk premium Book-to-market ratio Volatility Size According to the International Capital Asset Pricing Model (ICAPM), the covariance of assets with foreign exchange currency returns should be a risk factor that must be priced when the purchasing power parity is violated. The goal of this study is to re-examine the relationship between stock returns and foreign exchange risk. The novelties of this work are: (a) a data set that makes use of daily observations for the measurement of the foreign exchange exposure and volatility of the sample firms and (b) data from a Eurozone country. The methodology we make use in reference to the estimation of the sensitivity of each stock to exchange rate movements is that it allows regressing stock returns against factors controlling for market risk, size, value, momentum, foreign exchange exposure and foreign exchange volatility. Stocks are then classified according to their foreign exchange sensitivity portfolios and the return of a hedge (zero-investment) portfolio is calculated. Next, the abnormal returns of the hedge portfolio are regressed against the return of the factors. Finally, we construct a foreign exchange risk factor in such manner as to obtain a monotonic relation between foreign exchange risk and expected returns. The empirical findings show that the foreign exchange risk is priced in the cross section of the German stock returns over the period 2000–2008. Furthermore, they show that the relationship between returns and foreign exchange sensitivity is nonlinear, but it takes an inverse U-shape and that foreign exchange sensitivity is larger for small size firms and value stocks. 2011 Journal Article http://hdl.handle.net/20.500.11937/19280 10.1016/j.ribaf.2011.02.005 J A I Press Inc. restricted |
| spellingShingle | Momentum Fama–French Foreign exchange risk Asset pricing Market risk premium Book-to-market ratio Volatility Size Apergis, Nicholas Artikis, P. Sorros, J. Asset Pricing and Foreign Exchange Risk |
| title | Asset Pricing and Foreign Exchange Risk |
| title_full | Asset Pricing and Foreign Exchange Risk |
| title_fullStr | Asset Pricing and Foreign Exchange Risk |
| title_full_unstemmed | Asset Pricing and Foreign Exchange Risk |
| title_short | Asset Pricing and Foreign Exchange Risk |
| title_sort | asset pricing and foreign exchange risk |
| topic | Momentum Fama–French Foreign exchange risk Asset pricing Market risk premium Book-to-market ratio Volatility Size |
| url | http://hdl.handle.net/20.500.11937/19280 |