The long-run component of foreign exchange volatility and stock returns

The present paper explores the cross-sectional pricing power of foreign exchange volatility in the US stock market by decomposing it into short- and long-run components. Our approach is motivated by Bartov et al. (1996). Empirically, we find supporting evidence that the long-run component of foreign exchange volatility is priced in the US stock market. Our findings have important implications for international finance and empirical asset pricing.