The Effect of Markups on the Exchange Rate Exposure of Stock Returns
55 Pages Posted: 10 Mar 2000
Date Written: February 2000
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: Suggested Citation