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The pricing of common exchange rate factors in the U.S. equity market

Ding Du ()
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Ding Du: Northern Arizona University

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 3, 775-798

Abstract: Abstract We extend Lustig et al. (Rev Financ Stud 24:3731–3777, 2011) and Brusa et al. (The International CAPM Redux, 2014) by examining if the common exchange rate factors, the dollar and carry factors, are priced in the US equity market. Our results suggest that while the carry factor has incremental pricing information relative to the US market factor, the dollar factor (or the trade-weighted exchange rate index) is redundant. Our results have important theoretical as well as practical implications. Theoretically, we suggest that financial economists take an endogenous perspective of exchange rates. Practically, we suggest that practitioners incorporate in the carry factor to measure the exposure of exchange rate risk.

Keywords: Carry factor; Dollar factor; Exchange-rate exposure; U.S. equity market (search for similar items in EconPapers)
JEL-codes: G15 F31 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kap:rqfnac:v:50:y:2018:i:3:d:10.1007_s11156-017-0646-9