Pricing Currency Risk in Two Interlinked Stock Markets | Zendy

Jan Antell | Zendy; Mika Vaihekoski | Zendy

AI Assistant Blog Pricing

Home ZAIA Blog

Open Access

Pricing Currency Risk in Two Interlinked Stock Markets

Author(s) -

Jan Antell,

Mika Vaihekoski

Publication year - 2016

Publication title -

applied finance letters

Language(s) - English

Resource type - Journals

eISSN - 2253-5802

pISSN - 2253-5799

DOI - 10.24135/afl.v1i1.2

Subject(s) - currency , foreign exchange risk , stock (firearms) , capital asset pricing model , stock exchange , monetary economics , economics , autoregressive conditional heteroskedasticity , financial economics , exchange rate , risk premium , variable pricing , business , econometrics , finance , volatility (finance) , engineering , mechanical engineering

We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rate regime. Tests are conducted for a conditional asset pricing model using the Ding and Engle (2001) specification which allows estimation of multivariate GARCH-in mean models. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the flotation of the currencies. We also find some evidence of crosscountry exchange rate effects. Our model has many practical applications and can easily be applied to study other countries, different asset classes, or industries that are closely connected.

The content you want is available to Zendy users.

Already have an account? Click here to sign in.

Having issues? You can contact us here

Accelerating Research