Persistent exchange-rate changes; state variable and distress risk?

exchange rate as a source of uncertainty exposes investors to some kind of risk. When investors are exposure to exchange risk, it’s expected that investors expect higher return but some empirical evidences show that exchange risk is not priced. Since the exchange rate risk and stock returns are not correlated, we face some kind of anomaly that it is called “exposure risk” in the exchange-rate literature. Some evidences indicate, we can’t price exchange-rate risk because of using contemporaneous exchange-rate movements. This evidences state that persistent exchange-rate movements is a state variable and a financial distress risk and if we use persistent exchange-rate movements instead of contemporaneous exchange-rate movements then we can see that exchange-rate risk is priced. The purpose of this research is to test exchange-rate risk, as a state and financial distress risk variable, pricing in the Tehran security exchange to find a solution for exposure puzzle. In this research we calculate exchange-rate risk premium by “tracking portfolio” approach and then we test its pricing. For this purpose, we chose a sample with about 160 firms in Tehran security exchange in the period of 1384 to 1394. To survey our hypothesis, we use time series regression. The results show that persistent exchange-rate risk is priced in Tehran security exchange. So if we use persistent exchange-rate movements instead of contemporaneous exchange-rate movements, we can solve exposure puzzle.