Crossing the Lines: The Conditional Relation Between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets

48 Pages Posted: 20 Feb 2009 Last revised: 23 Dec 2019

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance; Centre for Economic Policy Research (CEPR)

Gordon M. Bodnar

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Multiple version iconThere are 3 versions of this paper

Date Written: October 12, 2010

Abstract

This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 - 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.

Keywords: Exchange rate exposure, exchange rate risk, return premia, international finance

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Bodnar, Gordon M., Crossing the Lines: The Conditional Relation Between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets (October 12, 2010). WBS Finance Group Research Paper No. 114, Available at SSRN: https://ssrn.com/abstract=1346873 or http://dx.doi.org/10.2139/ssrn.1346873

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gordon M. Bodnar (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-663-7731 (Phone)
202-663-7718 (Fax)

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