Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-15T05:04:14.924Z Has data issue: false hasContentIssue false
  • English
  • Français

The Pricing of Exchange Rate Risk in the Stock Market

Published online by Cambridge University Press:  06 April 2009

Philippe Jorion
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the pricing of exchange rate risk in the U.S. stock market, using two factor and multi-factor arbitrage pricing models. Evidence is presented that the relation between stock returns and the value of the dollar differs systematically across industries. The empirical results, however, do not suggest that exchange risk is priced in the stock market. The unconditional risk premium attached to foreign currency exposure appears to be small and never significant. As a result, active hedging policies by financial managers cannot affect the cost of capital, and other reasons must explain why firms decide to hedge.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 3 , September 1991 , pp. 363 - 376
Copyright
Copyright © School of Business Administration, University of Washington 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adler, M., and Dumas, B.. “International Portfolio Choice and Corporation Finance: A Synthesis.” Journal of Finance, 38 (06 1983), 925–984.CrossRefGoogle Scholar
Adler, M., and Dumas, B.. “Exposure to Currency Risks: Definition and Measurement.” Financial Management, 13 (Summer 1984), 41–50.CrossRefGoogle Scholar
Artus, J., and McGuirk, A. K.. “A Revised Version of the Multilateral Exchange Rate Model.” IMF Staff Papers, 28 (06 1981), 275–309.CrossRefGoogle Scholar
Bilson, J. “The Speculative Efficiency Hypothesis.” Journal of Business, 54 (07 1981), 435–451.CrossRefGoogle Scholar
Chen, N.-F.; Roll, R.; and Ross, S.. “Economic Forces and the Stock Market.” Journal of Business, 59 (07 1986), 383–403.CrossRefGoogle Scholar
Chow, G.Econometrics. New York: McGraw-Hill (1983).Google Scholar
Dufey, G., and Srinivasulu, S.. “The Case for Corporate Management of Foreign Exchange Risk.” Financial Management, 12 (Summer 1983), 54–62.CrossRefGoogle Scholar
Fama, E., and Gibbons, M.. “A Comparison of Inflation Forecasts.” Journal of Monetary Economics, 13 (05 1984), 327–348.CrossRefGoogle Scholar
Gibbons, M. “Multivariate Tests of Financial Models: A New Approach.” Journal of Financial Economics, 10 (01 1982), 3–28.CrossRefGoogle Scholar
Giovannini, A., and Jorion, P.. “The Time-Variation of Risk and Return in the Foreign Exchange and in the Stock Markets.” Journal of Finance, 44 (06 1989), 307–325.CrossRefGoogle Scholar
Heckerman, D. “The Exchange Risk of Foreign Operations.” Journal of Business, 44 (01 1972), 42–48.CrossRefGoogle Scholar
Hodder, J. “Exposure to Exchange Rate Movements.” Journal of International Economics, 13 (11 1982), 375–386.CrossRefGoogle Scholar
Jorion, P. “The Exchange Rate Exposure of U.S. Multinationals.” Journal of Business, 63 (07 1990), 331–345.Google Scholar
Levi, M.International Finance: Financial Management and the International Economy. New York: McGraw-Hill (1983).Google Scholar
MacKinlay, C. “On Multivariate Tests of the CAPM.” Journal of Financial Economics, 18 (06 1987), 341–371.CrossRefGoogle Scholar
Mathur, I. “Managing Foreign Exchange Rate Risk Profitably.” Columbia Journal of World Business, 17 (Winter 1982), 23–30.Google Scholar
Pagan, A. “Econometric Issues in the Analysis of Regressions with Generated Regressors.” International Economic Review, 25 (02 1984), 221–247.CrossRefGoogle Scholar
Ross, S. “The Arbitrage Theory of Capital Asset Pricing.” Journal of Economic Theory, 13 (12 1976), 341–360.CrossRefGoogle Scholar
Smith, C., and Stulz, R.. “The Determinants of Firms' Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (12 1985), 341–406.CrossRefGoogle Scholar
Solnik, B. “International Arbitrage Pricing Theory.” Journal of Finance, 38 (05 1983), 449–457.CrossRefGoogle Scholar
Stambaugh, R. “On the Exclusion of Assets from Tests of the Two-Parameter Model: A Sensitivity Analysis.” Journal of Financial Economics, 10 (11 1982), 237–268.CrossRefGoogle Scholar
Sweeney, R., and Warga, A.. “The Pricing of Interest-Rate Risk: Evidence from the Stock Market.” Journal of Finance, 51 (06 1986), 393–410.Google Scholar