The Effect of Markups on the Exchange Rate Exposure of Stock Returns

55 Pages Posted: 10 Mar 2000

See all articles by George Allayannis

George Allayannis

University of Virginia - Darden School of Business

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Date Written: February 2000

Abstract

This paper examines how to properly specify and test for factors that affect exchange-rate exposure. We develop a theoretical model, which explicitly identifies three channels of exposure: a) a positive effect through the competitive structure of the markets where final output is sold; b) a positive effect through the interaction of the competitive structure of the export market and the share of production that is exported; and c) a negative effect through the interaction of the competitive structure of the imported input market and the share of production that is imported. Using a sample of 82 U.S. manufacturing industries at the 4-digit SIC level, classified in 18 2-digit industry groups, between 1979 and 1995, we estimate exchange-rate exposure as suggested by our model. We find that approximately 4 out of 18 industry groups are significantly exposed to exchange-rate movements through at least one channel of exposure. On average, a 1 percent appreciation of the dollar decreases the return of the average industry by 0.13 percent. Consistent with our model's predictions, as industries become more (less) competitive, their exchange-rate exposure increases (decreases).

JEL Classification: F23, F31

Suggested Citation

Allayannis, George and Ihrig, Jane E., The Effect of Markups on the Exchange Rate Exposure of Stock Returns (February 2000). International Finance Discussion Paper No.661. Available at SSRN: https://ssrn.com/abstract=214391 or http://dx.doi.org/10.2139/ssrn.214391

George Allayannis

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

Jane E. Ihrig (Contact Author)

Federal Reserve Board - International Financial Transactions ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
354
Abstract Views
1,628
rank
88,387
PlumX Metrics