Yen/Dollar Exchange Rate Risk and Premium in Asian Countries

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1. Opposite to the U.S.result, the exchange rate risk exposure of Japanese firms is on average positive for the 1975-92 period when it is measured through stock market performance. In short, the finding from this study is unique since stock returns is positive to the (unexpected) appreciation of domestic currency, only observable in Japan.2. Opposed to the existing literature, this study documents a new finding that during the post-Plaza (1985-92) period the exchange risk is significantly priced in the Japanese capital market. The result is robust to empirical methodology between a conditional and an unconditional asset pricing model, the measure of yen/dollar exchange rates, and authogonalization of the explanatory variables or factors. It implies that the exchange risk premium is reflected on the firm's cost of equity capital and hedging in the capital market is irrelevant for investors' portfolios in Japan.3. from the theoretical view point, the result obtained in this study is interesting since the exchange risk factor has to be priced across international assets but here exchange risk is priced also across domestic assets. This result is further revalidated by the use of the more advanced empirical model of the Generalized Method of Moments (GMM). It implies that the international factor became a domestic one and its exposure is also domestically priced.4. The similar results have been derived for the post-Plaza Accord period for the two Asian markets, Malaysia and Indonesia. However, the robustness of the results for these two counties are somewhat weaker than the Japanese counterpart. We will continue our empirical investigation for more macroeconomic implications.5. Notice that two papers have been under review by major finance journals including the Journal of Financial and Quantitative Analysis.