Exchange Rate Risk Premium in the Chinese Stock Market——A Study at Industry Level
With the significant increase in the openness of the Chinese stock market,an increasing number of Chinese company stocks are being included in the MSCI Emerging Markets Index.Accurately analyzing the impact of exchange rate risk on the Chinese A-share market is becoming increasingly important,not only for China but also on a global scale.The aim of this study is to investigate how exchange rate risk affects the pricing of the Chinese stock market.Based on stock market transaction data and exchange rate data from July 2005 to June 2022,this paper explores how ex-change rate risk affects the pricing of the Chinese stock market using a dynamic conditional correlation multivariate GARCH model(DCC-MGARCH model).The results find that the exchange rate risk factor is an important pricing factor for the Chi-nese stock market.The exchange rate risk premium is an important component of the equity market risk premium,accounting for about 6.65％of the total market risk premium.Moreover,the exchange rate risk premium for emerging market countries is slightly higher than that for developed countries.In terms of industry characteristics,the proportion of state-owned companies within an industry significantly affects the exchange rate risk premium,while the degree of industry competition and company size only significantly impacts the exchange rate risk premium in developed countries.At the macro level,both foreign trade and monetary policy have a significant influence on the exchange rate risk premium,whereas the degree of RMB international-ization can significantly reduce the exchange rate risk premium in developed countries.The findings of this paper suggest that with the advancement of exchange rate marketization in China,the exchange rate is more associated with the stock market,and the exchange rate risk premium has become an important component of stock market risk premium.In light of the main findings of this study,the following policy recommendations are proposed.Firstly,policy institutions should balance considerations of exchange rate stability and exchange rate risk neutrality,taking into account both the foreign exchange market and the capital market.Secondly,investors should prioritize the market premium brought about by exchange rate risk during the investment process,seizing opportunities and managing risks arising from different phases of RMB depre-ciation and appreciation.Thirdly,efforts should continue to promote the internationalization of the RMB,aiming to position the RMB as an"anchor currency"in more currency baskets of nations,thereby expanding the scope and scale of RMB usage.
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