INVESTING THE PRICING OF EXCHANGE RATE RISK IN THE STOCK MARKET: EVIDENCE FROM PAKISTAN STOCK MARKET
Objective: This paper is designed to empirically examine the pricing of exchange rate risk in the stock market in Pakistan. Methodology: The study is based on two-factor and multi-factor arbitrage pricing models. The empirical evidences are based on 15 years monthly data from January 1998 to December 2015, for exchange rate, discount rate, inflation, t bill and the Karachi Stock Exchange (KSE) 100 indexes is collected from State Bank of Pakistan and Karachi Stock Exchange. Results: The results, however, conclude that the exchange rate risk is priced in the stock market. Whereas, the remaining factors such as risk premium attached to foreign currency exposure and the term structure of discount rate appear to have significant effect on exchange rate risk. We can generalize that the exchange market in Pakistan are influenced by the stock market. Policy implication: This paper provides empirical evidence that the risk exposure of exchange rate is largely influenced by the changes in stock market. Therefore, the concerned persons are proposed for the consideration of this issue.