Exchange risk and universal returns: A test of international arbitrage pricing theory Academic Article

abstract

• According to the international arbitrage pricing theory (IAPT) posited by Solnik (1983), currency movements affect assets' factor loadings and associated risk premiums. Based on a novel universal return decomposition, we propose an empirical model to test this proposition and perform tests using U.S. stock returns in the period 1975-2008. Our results confirm that currency movements significantly affect the market betas of a large proportion of stocks. Further cross-sectional tests indicate that currency movements affecting the market factor are significantly priced in stock returns. Based on these and other findings, we conclude that Solnik's IAPT is supported. An important implication of our findings is that exchange rate risk can broadly affect stock returns through both factor loading and residual factor channels. 2011.

authors

• Kolari, James

published proceedings

• PACIFIC-BASIN FINANCE JOURNAL

altmetric score

• 3

author list (cited authors)

• Armstrong, W. J., Knif, J., Kolari, J. W., & Pynnonen, S.

citation count

• 7

complete list of authors

• Armstrong, Will J||Knif, Johan||Kolari, James W||Pynnonen, Seppo

publication date

• January 2012

publisher

• Elsevier  Publisher

published in

• Pacific-Basin Finance Journal  Journal

keywords

• Currency Values
• Exchange Rate Risk
• Factor Loadings
• International Arbitrage Pricing Theory
• Risk Premiums

Digital Object Identifier (DOI)

• 10.1016/j.pacfin.2011.08.003

start page

• 24

end page

• 40

volume

• 20

issue

• 1

URL

• http%3A%2F%2Fdx.doi.org%2F10.1016%2Fj.pacfin.2011.08.003