The Foreign Exchange Risk Premium in the Cross-Section of Stock Returns: International Evidence

Abstract

Using the framework of the International Capital Asset Pricing Model, we estimate unconditional FX risk premiums for a large cross-section of firms from local currency perspectives. Further, we study the impact of potential FX risk diversifiability on FX risk premiums. Using equity data from nine major financial markets, we find support for FX risk being a contributing factor to stock return volatility in eight and a priced factor in four of the sample markets. Empirical estimates of FX risk premiums are economically meaningful, negative for U.S. and Swiss firms, and positive for Australian and Canadian firms.