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RMB exchange rate volatility and the cross-section of Chinese A-share returns

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  • Qiao, Tongshuai
  • Ding, Wenjie
  • Han, Liyan
  • Li, Donghui

Abstract

This study investigates the role of RMB exchange rate volatility in the cross-sectional pricing of Chinese A-share stocks. We find an inverted U-shaped relation between stock beta-loading on exchange rate volatility (FXV-beta) and future stock returns; that is, both stocks with high FXV-beta and those with low FXV-beta have lower future returns. We show that the underperformance of high-FXV-beta stocks is primarily driven by hedging demand. Specifically, to hedge exchange rate volatility risk, rational investors are willing to pay higher prices for high-FXV-beta stocks and accept lower future returns. We also provide evidence that the underperformance of low-FXV-beta stocks could be due to mispricing dominated by lottery investors.

Suggested Citation

  • Qiao, Tongshuai & Ding, Wenjie & Han, Liyan & Li, Donghui, 2024. "RMB exchange rate volatility and the cross-section of Chinese A-share returns," Journal of International Money and Finance, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:jimfin:v:142:y:2024:i:c:s0261560624000111
    DOI: 10.1016/j.jimonfin.2024.103024
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    More about this item

    Keywords

    RMB exchange rate volatility; Chinese A-shares; Cross-section of stock returns; Asset pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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