WPS 14-02: The Long-Run Component of Foreign Exchange Volatility and Stock Returns

Posted: Sunday, April 13th 2014 at 11:22 AM

Title:

The Long-Run Component of Foreign Exchange Volatility and Stock Returns

Authors:

Ding Du
Ou Hu


Abstract

The present paper explores the cross-sectional pricing power of foreign exchange volatility in the US stock market by decomposing it into short- and long-run components. Our approach is motivated by Bartov, Bodnar, and Kaul (1996). Empirically, we find supporting evidence that the long-run component of foreign exchange volatility is priced in the US stock market. Our findings have important implications for international finance and empirical asset pricing.

JEL classification: F31; G15

Keywords: Foreign exchange volatility; Long-run component of foreign exchange volatility; Short-run component of foreign exchange volatility; Mimicking-factor portfolios

WPS 14-02 April 2014

PDF of working paper HERE.



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