The Exchange Rate Exposure of U.S. and Japanese Banking Institutions
Santa Clara University - Leavey School of Business - Economics Department
University of British Columbia (UBC) - Division of Accounting
John S. Howe
University of Missouri at Columbia - Department of Finance
Sauder School of Business Working Paper
In this paper, we examine the foreign exchange exposure of a sample of U. S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U. S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting- based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U. S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.
Number of Pages in PDF File: 37
JEL Classification: F31, F23, G21, G28
Date posted: October 28, 1996
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