Foreign Exchange Exposure, Risk and the Japan Market

WP 96-80

Posted: 25 Jun 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: May 1996

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 sample periods. Exposure effects are also found to vary through time. We further show that both the market and currency risks are priced in the Japan stock market. Our results provide strong evidence that their conditional covariance risks are time-varying.

JEL Classification: F23, F31, G12

Suggested Citation

He, Jia and Ng, Lilian and Wu, Xueping, Foreign Exchange Exposure, Risk and the Japan Market (May 1996 ). WP 96-80, Available at SSRN: https://ssrn.com/abstract=7499

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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