Foreign Exchange Volatility is Priced in Equities

FRB of St. Louis Working Paper No. 2004-029E

39 Pages Posted: 24 Jul 2006

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Jason Higbee

Federal Reserve Bank of St. Louis - Research Division

Date Written: June 2007

Abstract

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

Guo, Hui and Neely, Christopher J. and Higbee, Jason, Foreign Exchange Volatility is Priced in Equities (June 2007). FRB of St. Louis Working Paper No. 2004-029E, Available at SSRN: https://ssrn.com/abstract=918296 or http://dx.doi.org/10.2139/ssrn.918296

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

Jason Higbee

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States

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