Exchange Rate Risk Pricing by US Equity for US Industrial Portfolios

Mahfuz Raihan

Abstract


This article examines the industry wide differences of the exchange rate risk exposure for US industries by estimating Fama-French multifactor model adding exchange rate risk as an additional factor. These time series regressions found statistically significant coefficients of exchange rate risk factor for only seven out of seventeen industries. In addition, the Fama-Macbeth two-stage regression for cross section stock returns found no significant support for existence of risk premium for investors for the exchange rate risk. One possible explanation may be the size of the US equity market, which is so large and offers so many different classes of assets that exchange rate change may be rendered diversifiable. Secondly, the US financial market has extensive forward (future) products for foreign currencies, that it may offer a hedging strategy against sudden exchange rate change. These facets of the US market may explain why, investors do not get any premium in asset market for the exchange rate change risk factor.

Full Text: PDF DOI: 10.5539/ijef.v5n11p13

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This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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