Institutional Investors and Foreign Exchange Risk

43 Pages Posted: 15 Mar 2010 Last revised: 23 Jan 2011

See all articles by Timo P. Korkeamaki

Timo P. Korkeamaki

Hanken School of Economics - Department of Finance and Statistics

Danielle Xu

Gonzaga University

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2010

Abstract

Financial institutions differ from individual investors both in their analytical ability and in their level of diversification. Their access to derivative markets is also superior compared to that enjoyed by individual investors. All these factors make institutional investors more capable of homemade hedging, and thus lead to an expectation that institutions are drawn to firms with higher foreign exchange risk. Our results support this expectation. We find that after controlling for previously documented determinants of institutional ownership, institutional investors on aggregate are drawn to FX exposure. These findings vary depending on whether the institution type is constrained in its risk-taking by the prudent man law.

Keywords: institutional investors, foreign exchange risk, homemade hedging

JEL Classification: G20, G32

Suggested Citation

Korkeamaki, Timo and Xu, Danielle, Institutional Investors and Foreign Exchange Risk (December 5, 2010). Available at SSRN: https://ssrn.com/abstract=1570977 or http://dx.doi.org/10.2139/ssrn.1570977

Timo Korkeamaki (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

Danielle Xu

Gonzaga University ( email )

Spokane, WA 99258
United States

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