Asset pricing and foreign exchange risk

Apergis, Nicholas; Artikis, Panagiotis G.; Sorros, John

doi:10.1016/j.ribaf.2011.02.005

Cited by 18 publications

(6 citation statements)

References 38 publications

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“…On the basis of the principle of parsimony and the fact that the results of foreign exchange exposure are robust across the augmented Fama-French three-factor model, the augmented Carhart four-factor model and the augmented Fama-French five-factor model, the study recommends the use of the augmented Fama-French three-factor model in the estimation of unconditional foreign exchange exposure of nonfinancial firms in South Africa. This recommendation is also in line with recent practice in the estimation of emerging market foreign exchange exposure as evidenced by Aggarwal and Harper (2010), Apergis et al (2011), Huffman et al (2010, Kolari et al (2008) and Priestley and Ødegaard (2007).…”

Section: Jrf 212supporting

confidence: 83%

Emerging market currency risk exposure: evidence from South Africa

Molele

Mukuddem‐Petersen

2020

JRF

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Purpose The purpose of this paper is to examine the level of foreign exchange exposure of listed nonfinancial firms in South Africa. The study spans the period January 2002 and November 2015. Foreign exchange risk exposure is estimated in relation to the exchange rate of the South African Rand relative to the US$, the Euro, the British Pound and the trade-weighted exchange rate index. Design/methodology/approach The study is based on the augmented-market model of Jorion (1990). The Jorion (1990) is a capital asset pricing model-inspired framework which models share returns as a function of the return on the market index and changes in the exchange rate factor. The market risk factor is meant to discount the effect of macroeconomic factors on share returns, thus isolating the foreign exchange risk factor. In addition, the study further added the size, value, momentum, investment and profitability risk factors in line with the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model to account for the fact that equity capital markets in countries such as South Africa are known to be partially segmented. Findings Foreign exchange risk exposure levels were estimated at more than 40% for all the proxy currencies on the basis of the standard augmented market model. However, after controlling for idiosyncratic factors, through the application of the Fama–French three-factor model, the Carhart four-factor model and the Fama–French five-factor model, exposure levels were found to range between 6.5 and 12%. Research limitations/implications These results indicate the importance of controlling for the effects of idiosyncratic facto0rs in the estimation of foreign exchange risk exposure in the context of emerging markets of Sub-Saharan Africa (SSA). Originality/value This is the first study to apply the Fama–French three-factor model, Carhart four-factor model and the Fama–French five-factor model in the estimation of foreign exchange exposure of nonfinancial firms in the context of a SSA country. These results indicate the importance of controlling for the effects of idiosyncratic factors in the estimation of foreign exchange risk exposure in the context of emerging markets.

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Section: Jrf 212supporting

confidence: 83%

Emerging market currency risk exposure: evidence from South Africa

Molele

Mukuddem‐Petersen

2020

JRF

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“…They find that many sector returns are correlated with exchange rate changes. Apergis et al (2011) find that foreign exchange risk is priced in the crosssection of German stock returns over the period 2000-2008. In addition, the relationship between stock returns and foreign exchange sensitivity is non-linear. Inci and Lee (2014) find that there is a significant causal relationship running from exchange rate changes to stock returns in nine major industries in eight major countries.…”

Section: Introductionmentioning

confidence: 93%

Are Thai Equity Index Returns Sensitive to Interest and Exchange Rate Risks?

Jiranyakul

2016

SSRN Journal

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This study examines the sensitivity of the Thai stock market to nominal and real interest rate, and exchange rate risks during January 2005 and December 2013 using quantile regression. The analysis focuses on sectoral level and one main index in the stock market. The empirical results show that the stock market is more sensitive to exchange rate risk than interest rate risk. However, the impacts of these risks are different across equity index returns. The results from this study give implication for risk management of portfolio mangers and investors.

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“…German data from 2000 to 2008 was used, but the currency premium is not directly estimated. However, the authors state that currency risk is a pricing factor since the model's error (intercept) is reduced when the currency factor is added [37]. In another article, Du and Hu offer an alternative way to estimate firms' exposure to currency risk.…”

Section: Higher School Of Economicsmentioning

confidence: 99%

The Impact of Currency Risk on Firm’s Value in Emerging Countries

Kuchin¹,

Elkina²,

Dranev³

2019

КФ

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This study is dedicated to estimating the impact of currency risk on the cost of equity in Brazil, Russia, India and South Africa. Our contribution to the literature is that we obtain further evidence on pricing of exchange rate risk in developing countries which for now is quite scarce. These motivates our research which is dedicated to BRICS capital markets with Chinese stock market excluded since it is heavily regulated. The aim of the research is to determine whether in emerging countries stock markets currency risk is a significant factor that influence cost of equity capital of a company. Changes in the value of exchange rate can impact cash flows of a firm and their riskiness, hence, the value of the company. In our research we will discuss the influence of exchange rate movements on the value of the firm through their impact on the cost of equity. Specifically, we investigate whether companies that report substantial currency gains or losses have to pay a higher required return on equity. Furthermore, in this study we take an attempt to estimate currency risk premia for exposure to appreciation and depreciation of currency separately and identify possible differences. For each country three models that extend Fama-French Three Factor Model by incorporating currency risk are estimated. We used equal-weighted portfolio approach to construction currency risk factors. They are estimated using information about the ratio of currency gains to sales or the magnitude of covariation between equity returns and exchange rate changes. In the second case appreciation and depreciation of domestic currency against US dollar is considered separately. Results indicate that in Russia firms which report substantial currency losses pay a positive risk premium, while in Brazil, India and South Africa companies with significantly positive or negative currency gains pay a lower required return on equity than firms with almost zero currency gains. Finally, we are trying to explain estimation results using sectoral breakdown of product exports in each country of data sample.

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Asset pricing and foreign exchange risk

Cited by 18 publications

References 38 publications

Emerging market currency risk exposure: evidence from South Africa

Emerging market currency risk exposure: evidence from South Africa

Are Thai Equity Index Returns Sensitive to Interest and Exchange Rate Risks?

The Impact of Currency Risk on Firm’s Value in Emerging Countries

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