Foreign Exchange Volatility is Priced in Equities
FRB of St. Louis Working Paper No. 2004-029E
39 Pages Posted: 24 Jul 2006
Date Written: June 2007
This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors from buying options on foreign exchange futures. Foreign exchange volatility does influence stock returns, however. The volatility of the JPY/USD exchange rate predicts the time series of stock returns and is priced in the cross-section of stock returns. Foreign exchange volatility risk might be priced because of its relation to foreign exchange level risk.
Keywords: exchange rate, option, implied volatility, realized volatility, asset pricing
JEL Classification: F31, G15
Suggested Citation: Suggested Citation