This paper was formerly circulated under the title “Is Foreign Exchange Delta Hedging Risk Priced?” The authors thank Ken French for the Fama and French factors as well as the momentum factor, Lubos Pastor for the liquidity factor, Carol Osler for the foreign exchange data, and Martin Lettau for the consumption-wealth data. We thank an anonymous referee, Andrea Buraschi, Chuck Whiteman, Mark Wohar, and participants at the 2005 Missouri Economics Conference and the 2005 FMA annual meeting for helpful suggestions. The views expressed are those of the authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System. Any errors are our own. The authors worked in the Research Division of Federal Reserve Bank of St. Louis when this project began.
Foreign Exchange Volatility Is Priced in Equities
Article first published online: 3 DEC 2008
© 2008 Financial Management Association International.
Volume 37, Issue 4, pages 769–790, Winter 2008
How to Cite
Guo, H., Neely, C. J. and Higbee, J. (2008), Foreign Exchange Volatility Is Priced in Equities. Financial Management, 37: 769–790. doi: 10.1111/j.1755-053X.2008.00034.x
- Issue published online: 3 DEC 2008
- Article first published online: 3 DEC 2008
This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors that occur as a result of the purchase of 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.