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Understanding the pricing of currency risk in global equity markets

Author

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  • Karolyi, G. Andrew
  • Wu, Ying
Abstract
This paper explores potential economic mechanisms through which fluctuations in exchange rates are priced in international stock returns. Our investigation focuses on two currency risk factors – a dollar-risk factor and a carry-trade-risk factor – and their explanatory power for a variety of test assets comprised of monthly returns for over 47,000 stocks from 46 countries and over four decades. We find that currency risk is more likely to be priced among firms producing tradeable goods, and especially during periods of heightened exchange rate volatility. This finding is robust with respect to the evaluating criteria on firm internationalization, the benchmark factor models chosen, and the sub-periods examined.

Suggested Citation

  • Karolyi, G. Andrew & Wu, Ying, 2022. "Understanding the pricing of currency risk in global equity markets," Journal of Multinational Financial Management, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:mulfin:v:63:y:2022:i:c:s1042444x21000505
    DOI: 10.1016/j.mulfin.2021.100727
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    References listed on IDEAS

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    More about this item

    Keywords

    International asset pricing; Currency risk; Exchange rates;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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