Persistent exchange-rate movements and stock returns

Ding Du

Journal of International Financial Markets, Institutions and Money, 2014, vol. 28, issue C, 36-53

Abstract: We hypothesize that persistent exchange-rate movements are a distress risk and a state variable in the Merton (1973) sense. To test our hypothesis, we use the tracking portfolio approach of Lamont (2001) to capture news about future persistent exchange-rate movements. We find empirical evidence that supports our hypothesis, which has important implications for both international finance and empirical asset pricing. For international finance, our evidence provides an alternative explanation for the exposure puzzle and suggests researchers focus on persistent, instead of contemporaneous, exchange-rate movements. For empirical asset pricing, our findings imply a fresh and plausible perspective of exchange-rate risk, a state variable underlying the Fama–French factors.

Keywords: Persistent exchange-rate movements; Distress risk; Tracking portfolio; Stock returns (search for similar items in EconPapers)
JEL-codes: F31 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 (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1042443113000838
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:28:y:2014:i:c:p:36-53

DOI: 10.1016/j.intfin.2013.10.007

Access Statistics for this article

Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely

More articles in Journal of International Financial Markets, Institutions and Money from Elsevier
Bibliographic data for series maintained by Catherine Liu ().