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Working Paper 2004-029F

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"Foreign Exchange Volatility is Priced in Equities"
by Hui Guo, Christopher J. Neely, and Jason Higbee

This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors from buying options on foreign exchange futures. Foreign exchange volatility does influence stock returns, however. The volatility of the JPY/USD exchange rate predicts the time series of stock returns and is priced in the cross-section of stock returns. Foreign exchange volatility risk might be priced because of its relation to foreign exchange level risk.

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Category > International
Category > Finance
Category > Applied Econometrics
Author > Hui Guo
Author > Christopher J. Neely