Is the Exchange Risk Premium in Stock Markets Related to Firm Characteristics?

Abstract

This paper provides new evidence on the determinants of exchange risk premia in the stock market using firm level data from Korea. We conduct empirical asset pricing tests using cross-sectional data at firm level to determine whether exchange risk is priced under alternative model specifications and to see whether the estimated exchange risk premium can be related to firm characteristics. Our results support the hypothesis of a significant unconditional exchange risk premium in the Korean stock market at the individual firm level. We also find that the exchange risk premium is more significant, statistically and economically, for firms with larger size and higher percentage of foreign ownership. However, we find weak evidence suggesting that the exchange risk premium may be lower for firms with higher liquidity.