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Foreign exchange rate exposure and risk premium in international investments: Evidence from American depositary receipts

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  • Bae, Sung C.
  • Kwon, Taek Ho
  • Li, Mingsheng

Abstract

We examine how exchange rate changes affect the security returns and how economic and translation exposure components of exchange rate risk are priced across countries. Employing ADRs of four countries, we document four main findings. First, exchange rate changes are negatively related to underlying share returns of ADRs, but positively to ADR returns observed in the U.S. markets. Second, ADR returns are more closely related to local market returns than U.S. market returns, indicating that the local market environment plays a bigger role in determining ADR returns. Third, U.S. and local investors require different risk premiums for exchange rate risk present in ADR investments. Fourth, both the source (economic or translation exposure) and magnitude (high or low) of the exchange risk premium vary across countries. We obtain robust empirical findings for both country ADR portfolios and individual ADRs.

Suggested Citation

  • Bae, Sung C. & Kwon, Taek Ho & Li, Mingsheng, 2008. "Foreign exchange rate exposure and risk premium in international investments: Evidence from American depositary receipts," Journal of Multinational Financial Management, Elsevier, vol. 18(2), pages 165-179, April.
    • Handle: RePEc:eee:mulfin:v:18:y:2008:i:2:p:165-179
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    Cited by:

    1. Mark Schaub & Todd A. Brown, 2015. "Long Term Adr Performance: How Do Regional Issues Listed On The Nyse Compare To Us And Regional Index Returns?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(3), pages 45-58.
    2. Chen, Mei-ping & Lee, Chien-Chiang & Hsu, Yi-Chung, 2011. "The impact of American depositary receipts on the Japanese index: Do industry effect and size effect matter?," Economic Modelling, Elsevier, vol. 28(1-2), pages 526-539, January.
    3. Omar Esqueda & Yongli Luo & Dave Jackson, 2015. "The linkage between the U.S. “fear index” and ADR premiums under non-frictionless stock markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 541-556, July.
    4. Mpoha, Salifya & Bonga-Bonga, Lumengo, 2020. "Assessing the extent of exchange rate risk pricing in equity markets: emerging versus developed economies," MPRA Paper 99597, University Library of Munich, Germany.
    5. Mpoha, Salifya & Bonga-Bonga, Lumengo, 2021. "Spillover effects from China and the US to global emerging markets: a dynamic analysis," MPRA Paper 109349, University Library of Munich, Germany.
    6. Lee, Chien-Chiang & Chen, Mei-Ping & Chang, Chi-Hung, 2014. "Industry co-movement and cross-listing: Do home country factors matter?," Japan and the World Economy, Elsevier, vol. 32(C), pages 96-110.
    7. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.
    8. Alma Hales, 2015. "Liquidity and price discovery in Latin America: evidence from American depositary receipts," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(4), pages 661-678, October.
    9. repec:ers:journl:v:vi:y:2018:i:1:p:54-60 is not listed on IDEAS
    10. Rövekamp, Ingmar & Eichler, Stefan, 2016. "A market-based indicator of currency risk: Evidence from American Depositary Receipts," VfS Annual Conference 2016 (Augsburg): Demographic Change 145791, Verein für Socialpolitik / German Economic Association.
    11. Muhammad Ahad & Ijaz ur Rehman & Fiza Qureshi & Waqas Hanif & Zaheer Anwer, 2018. "Modelling Asymmetric Impact of Home Country Macroeconomic Variables on American Depository Receipts: Evidence from Eurozone," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 703-727, November.
    12. Lee, Chien-Chiang & Chang, Chi-Hung & Chen, Mei-Ping, 2015. "Industry co-movements of American depository receipts: Evidences from the copula approaches," Economic Modelling, Elsevier, vol. 46(C), pages 301-314.
    13. Xuechun Zhang & Ruihui Xu & Xue Liu, 2022. "Premiums between Cross‐listed Shares: Determinants and Assessment of Financial Reform Policy Effectiveness," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 30(3), pages 75-99, May.
    14. Augustine C. Arize & Giuliana Campanelli Andreopoulos & Ioannis N. Kallianiotis & John Malindretos, 2018. "MNC Transactions Foreign Exchange Exposure: An Application," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 54-60.
    15. Bonga-Bonga, Lumengo & Mpoha, Salifya, 2024. "Spillover effects from China and the United States to Key Regional Emerging Markets: A dynamic analysis," International Review of Financial Analysis, Elsevier, vol. 91(C).
    16. Eichler, Stefan & Roevekamp, Ingmar, 2018. "A market-based measure for currency risk in managed exchange rate regimes," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 141-159.
    17. Omar Esqueda & Dave Jackson, 2012. "Currency depreciation effects on ADR returns: evidence from Latin America," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(3), pages 691-711, July.

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