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Foreign Exchange Risk, Equity Risk Factors and Economic Growth

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Abstract

This paper examines the information content of the equity risk factors that explain cross variation of stock returns and predicting future macroeconomic growth. For the first time we incorporate a new foreign exchange risk factor, providing important insights into the relationship between risk factors and the business cycle. The methodology involves the performance of a stepwise regression analysis of future macroeconomic growth against the lagged returns of five risk factors (market risk premium, size, value, momentum and foreign exchange risk). The results are validated with Granger causality tests and out-of-sample dynamic forecasting. They show that the foreign exchange risk factor contains strong, stable and statistically significant incremental information concerning future macroeconomic growth. Firms that are sensitive to the foreign exchange risk thrive when an economic upturn is anticipated and firms that are insensitive to the foreign exchange risk will have larger returns when an economic downturn is anticipated.

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Authors and Affiliations

  1. Department of Banking and Financial Management, University of Piraeus, 80 Karaoli & Dimitriou, 18534, Piraeus, Greece

    Nicholas Apergis

  2. Department of Business Administration, University of Piraeus, 80 Karaoli & Dimitriou, 18534, Piraeus, Greece

    Panagiotis G. Artikis

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  1. Nicholas Apergis
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  2. Panagiotis G. Artikis
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Correspondence to Nicholas Apergis.

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Apergis, N., Artikis, P.G. Foreign Exchange Risk, Equity Risk Factors and Economic Growth. Atl Econ J 44, 425–445 (2016). https://doi.org/10.1007/s11293-016-9520-8

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  • DOI: https://doi.org/10.1007/s11293-016-9520-8

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