The Foreign Exchange Risk Premium in the Cross-Section of Stock Returns : International Evidence

Using the framework of the International Capital Asset Pricing Model (ICAPM), we explore two central topics associated with equity foreign exchange (FX) risk premia. First, we estimate FX risk premia for a large cross-section of firms. Second, we study the diversifiability of FX risk. Using equity data from nine major financial markets, we find support for FX risk being a priced factor in the unconditional setting. Empirical estimates of FX risk premia are negative and economically meaningful for firms in most of the sample markets; the exception is Australian and Canadian firms for which FX risk premia are substantial and positive in sign. Further, we observe that FX risk does not appear to be fully diversifiable from seven major currency perspectives