Foreign Exchange Volatility Is Priced in Equities |
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| Authors: | Hui Guo Christopher J Neely Jason Higbee |
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| Institution: | 1. Hui Guo is an Assistant Professor of Finance at the University of Cincinnati, Cincinnati, OH.;2. Chris Neely is an Assistant Vice President at the Federal Reserve Bank of St. Louis, St. Louis, MO.;3. Jason Higbee is an analyst with the Social Capital Network, Nairobi, Kenya. |
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| Abstract: | This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors that occur as a result of the purchase of options on foreign exchange futures. Foreign exchange volatility does influence stock returns, however. The volatility of the JPY/USD exchange rate predicts the time series of stock returns and is priced in the cross‐section of stock returns. |
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