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Is Foreign Exchange Risk Priced in the Japanese Stock Market?

Published online by Cambridge University Press:  06 April 2009

Jongmoo Jay Choi
Affiliation:
Temple University, School of Business and Management, Finance Department, Philadelphia, PA 19122
Takato Hiraki
Affiliation:
Graduate School of International Management, International University of Japan, Yamato-machi, Niigata-ken 949–7277, Japan.
Nobuya Takezawa
Affiliation:
Graduate School of International Management, International University of Japan, Yamato-machi, Niigata-ken 949–7277, Japan.

Abstract

The exchange rate is an important variable that affects international competitiveness and performance of Japanese firms. We use an unconditional and a conditional multi-factor asset pricing model to examine whether exchange risk is recognized and priced in the Japanese stock market. The results indicate that the exchange risk is generally priced in Japan. More specifically, we provide evidence, in the unconditional model, that the exchange risk is priced in both weak and strong yen periods, when the bilateral yen/U.S. dollar exchange rate measure is used. The results are more mixed when the trade-weighted exchange rate is used. For the conditional model, the exchange risk is priced regardless of the exchange rate measure used. The combined evidence from the two models suggests an interesting observation about the role of the secular exchange rate trend in shaping the perception of exchange risk in the Japanese capital markets.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1998

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