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The Pricing of Exchange Rate Risk and Stock Market Segmentation: The Canadian Case

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  • Cheung, C Sherman
  • Kwan, Clarence C Y
  • Lee, Jason

Abstract

Empirical evidence by Eun and Resnick (1988), among others, has demonstrated the significance of exchange rate risk in the international asset allocation and they have noted that the risk is nondiversifiable. Yet, exchange rate risk was found by Jorion (1991) to be a risk factor that is not priced in the U.S. stock market. This study reexamines such counterintuitive results using data from the Toronto Stock Exchange. The evidence here weakly supports the pricing of the exchange rate risk. Further, the sample period in this study coincides with Jorion's to ensure that both studies examine the pricing of the exchange rate risk in the same global economic environment. The significance pricing of exchange rate risk in Canada and the insignificant pricing in the U.S. imply the possibility of market segmentation. Copyright 1995 by Kluwer Academic Publishers

Suggested Citation

  • Cheung, C Sherman & Kwan, Clarence C Y & Lee, Jason, 1995. "The Pricing of Exchange Rate Risk and Stock Market Segmentation: The Canadian Case," Review of Quantitative Finance and Accounting, Springer, vol. 5(4), pages 393-402, December.
    • Handle: RePEc:kap:rqfnac:v:5:y:1995:i:4:p:393-402
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    Cited by:

    1. Ding Du & Pin Ng & Xiaobing Zhao, 2013. "Measuring currency exposure with quantile regression," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 549-566, October.
    2. Robert Goldberg, 2015. "A methodology for computing and comparing implied equity and corporate-debt Sharpe Ratios," Review of Quantitative Finance and Accounting, Springer, vol. 44(4), pages 733-754, May.
    3. Anil Mishra, 2011. "Australia’s equity home bias and real exchange rate volatility," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 223-244, August.
    4. Ding Du, 2018. "The pricing of common exchange rate factors in the U.S. equity market," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 775-798, April.

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