The Foreign Exchange Exposure of UK Non-Financial Firms: A Comparison of Market-Based Methodologies
28 Pages Posted: 19 Aug 2012
Date Written: April 2, 2012
We use a sample of 269 UK non-financial firms to study the sensitivity of foreign exchange exposure, and its determinants, to the different estimation methods. The standard Jorion’s model suggests that 14.93% (30.50%) of the firms in our sample are exposed directly or indirectly to the fluctuations in the TWC (the US$, the Euro or the JP¥). However, the exposure increases substantially to 85.13% (96.65%) when time varying exposure regressions with orthogonalized market returns are used. We also show that the determinants of currency exposure are model-dependent. While the cross-sectional results suggest very little or no relationship between firm-specific factors and currency exposure, the explanatory power of these factors increase when data is pooled across firms and time.
Keywords: Foreign exchange exposure, Currency risk, Panel estimation
JEL Classification: F31, F23
Suggested Citation: Suggested Citation