Foreign Exchange Exposure, Risk and the Japanese Stock Market

Posted: 7 May 1998

See all articles by Jia He

Jia He

The Chinese University of Hong Kong (CUHK) - Department of Finance

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Xueping Wu

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: Undated

Abstract

This paper presents a comprehensive empirical examination of the foreign exposure effect on Japanese corporations and sectors. We provide compelling evidence that, after controlling for marketwide movements, the exposure effect on Japanese corporations' stock returns is both statistically and economically significant. Based on a wide array of about 1200 Japanese firms and a group of 23 different Japanese industries in our sample, we find that Japanese stock returns on average are negatively correlated with contemporaneous exchange rate changes but are virtually uncorrelated with lagged exchange rate fluctuations. The results are robust not only across exporting and non-exporting firms and industries, but also across the sample period, indicating the presence of time variation in exposure effects. An exploratory investigation suggests that time-varying exposures are related to regime-switching exchange rate dynamics, and these effects are more pronounced in industries with high exports. We further show that both the market and currency risks are priced in the Japanese stock market and that their conditional components are time-varying. Overall, our results suggest that Japanese stock investors cannot diversify away the market risk, nor can they diversify away the currency risk.

JEL Classification: F31, G12

Suggested Citation

He, Jia and Ng, Lilian and Wu, Xueping, Foreign Exchange Exposure, Risk and the Japanese Stock Market (Undated ). Available at SSRN: https://ssrn.com/abstract=4062

Jia He

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+882 2609 8568 (Phone)

Lilian Ng (Contact Author)

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Xueping Wu

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

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