Currency Risk Premia in Global Stock Markets

Author/Editor:

Matthew D. Merritt ; Shaun K. Roache

Publication Date:

August 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Large fundamental imbalances persist in the global economy, with potential exchange rate implications. This paper assesses whether exchange rate risk is priced across G-7 stock markets. Given the multitude of hedging instruments available, theory suggests that stock market investors should not be compensated for currency risk. However, data covering 33 industry portfolios across seven major stock markets suggest that not only is exchange rate risk priced in many markets, but that it is time-varying and sensitive to currency-specific shocks. With stock market investors typically exhibiting "home bias," this suggests that investors are using equity asset proxies to hedge the exchange rate risks to consumption.

Series:

Working Paper No. 2006/194

Subject:

Currencies Exchange rate risk Exchange rates Return on investment Stock markets

Frequency:

Bimonthly

English

Publication Date:

August 1, 2006

ISBN/ISSN:

9781451864540/1018-5941

Stock No:

WPIEA2006194

Pages:

27

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