Foreign exchange volatility and stock returns

Ding Du, Ou Hu

Research output: Contribution to journalArticlepeer-review

15 Scopus citations


This paper explores whether foreign exchange volatility is a priced factor in the US stock market. Our investigation is motivated by a number of empirical as well as theoretical considerations. Empirically, Menkhoff et al. (2012) find that foreign exchange volatility is a pervasive factor across a variety of test assets. Theoretically, Shapiro (1974), Dumas (1978), and Levi (1990) imply that foreign exchange volatility can influence firms' cash flow volatility therefore the discount rate. In terms of empirical implementation, we employ the cross-sectional regression methodology of Fama and MacBeth (1973) as well as the time-series regression approach of Fama and French (1996). For robustness, we also use the mimicking portfolio approach of Fama and French (1993). We find that foreign exchange volatility has no power to explain either the time-series or the cross-section of stock returns, which calls for more research on foreign exchange risk. Bartov et al. (1996) and Adrian and Rosenberg (2008) suggest an alternative and maybe promising direction.

Original languageEnglish (US)
Pages (from-to)1202-1216
Number of pages15
JournalJournal of International Financial Markets, Institutions and Money
Issue number5
StatePublished - Dec 2012


  • Exchange rate risk factor
  • Foreign exchange volatility
  • Mimicking portfolios

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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