RMB exchange rate volatility and the cross-section of Chinese A-share returns

Tongshuai Qiao, Wenjie Ding, Liyan Han and Donghui Li

Journal of International Money and Finance, 2024, vol. 142, issue C

Abstract: This study investigates the role of RMB exchange rate volatility in the cross-sectional pricing of Chinese A-share stocks. We find an inverted U-shaped relation between stock beta-loading on exchange rate volatility (FXV-beta) and future stock returns; that is, both stocks with high FXV-beta and those with low FXV-beta have lower future returns. We show that the underperformance of high-FXV-beta stocks is primarily driven by hedging demand. Specifically, to hedge exchange rate volatility risk, rational investors are willing to pay higher prices for high-FXV-beta stocks and accept lower future returns. We also provide evidence that the underperformance of low-FXV-beta stocks could be due to mispricing dominated by lottery investors.

Keywords: RMB exchange rate volatility; Chinese A-shares; Cross-section of stock returns; Asset pricing (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:142:y:2024:i:c:s0261560624000111

DOI: 10.1016/j.jimonfin.2024.103024

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