Cash Flows, Currency Risk, and the Cost of Capital

Du, Ding; Hu, Ou

doi:10.1111/jfir.12032

Cited by 10 publications

(5 citation statements)

References 42 publications

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“…They regress changes in cash flows normalised by assets on changes in currency value and treat this coefficient as currency risk exposure. Analysing US data from 1980 to 2008, the authors tested a Carhart Four Factor Model without a high-minus-low factor, but with a currency factor, and concluded that currency risk premium is significant and usually positive [38]. Alternatively, one can try volatility of exchange rate as a base for a currency risk factor: it could be either a change in volatility or the difference in returns of currency volatility between sensitive and insensitive firms.…”

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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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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“…Early unconditional tests (e.g., Jorion , ) find that U.S. stocks are generally not sensitive to currency fluctuations and that there is no significant relation between currency risk and mean excess returns across U.S. stocks. More recent conditional tests (e.g., Francis, Hasan, and Hunter ) suggest that currency risk is indeed priced in the U.S. equity market and that the currency risk premium depends on U.S. macroeconomic conditions (e.g., U.S. monetary policy) (see also Bodnar and Gentry ; Bartov and Bodnar ; Chow, Lee, and Solt ; Allayannis and Ihrig ; Dominguez and Tesar ; Williamson ; Bodnar, Dumas, and Marston ; Kolari, Moorman, and Sorescu ; Bartram, Brown, and Minton ; Balvers and Klein ; Du and Hu ).…”

Section: Introductionmentioning

confidence: 99%

Currency Risk Premium and U.S. Macroeconomic Announcement

Zhao

2016

J of Financial Research

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In this article, we test whether the currency risk premium in the U.S. equity market is particularly higher on prescheduled U.S. macroeconomic announcement days. Our empirical analyses find supporting evidence. Our results help strengthen recent conditional tests on currency risk and suggest that the currency risk premium in the U.S. equity market is driven by U.S. macroeconomic conditions (e.g., U.S. monetary policy).

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“… Non-accounting-factor-based models (Sercu 1980, Stulz, 1995; and  Accounting-factor-based models (Balvers and Klien, 2013, Du and Hu, 2014, Francis et al, 2008.…”

Section: Capital Asset Pricing Model (Capm) Development and Currency ...mentioning

confidence: 99%

“…Cash flow has been discussed to be one of the effective proxies for being the linking factor between the currency sensitivity and the stock performance (Hou, Karolyi and Kho, 2011). The CAPM-based model with currency risk premium of this study has been motivated by the risk premium model that uses cash flow as the proxy for the currency risk premium (Du and Hu, 2014). The portfolio approach used by Du and Hu provides the benefit of nonlinear and time-varying currency risk exposure.…”

Section: Selected Currency Risk Premium Model 21mentioning

confidence: 99%

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Is�currency risk priced in the�stock return - evidence from AEC markets

Vorasitchai

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When investors from different countries invest abroad in the same destination country and same asset is invested, they may achieve different foreign asset return or value after converting back to the home currency in each country, in other words, the value of such investment and its return could differ from what they retain in the that foreign currency.� This phenomenon leads to the risk called currency risk.� The currency risk could also be seen in several different ways such as economic risk, transaction risk as so on.� Considering the value of the asset return after converting back to home currency, as the value of such return varies across countries, it means investors who is risk averse should require a compensation.

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Cash Flows, Currency Risk, and the Cost of Capital

Cited by 10 publications

References 42 publications

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

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

Currency Risk Premium and U.S. Macroeconomic Announcement

Is�currency risk priced in the�stock return - evidence from AEC markets

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