Exchange risk and asset returns: A theoretical and empirical study of an open economy asset pricing model

Lin Huang, Jia Wu and Rui Zhang

Emerging Markets Review, 2014, vol. 21, issue C, 96-116

Abstract: This study develops a consumption-based asset pricing model in which domestic consumers can buy goods from domestic and foreign markets but can only invest in domestic markets. In this model, the exchange rate influences asset prices through the marginal utility of consumption and increases the risks investors face. We find that our model can successfully price the 25 Fama–French portfolios and industry portfolios in the Chinese market, and the exchange rate is an important pricing factor in the unconditional linear model. We also find that the exchange risk is time-varying and countercyclical, which can help to explain the countercyclicality in equity premium.

Keywords: Exchange risk pricing; Consumption-based asset pricing model; Emerging markets (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:21:y:2014:i:c:p:96-116

DOI: 10.1016/j.ememar.2014.08.002

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