Direct versus Indirect Regression Estimates of Foreign Exchange Cash Flow Exposure

35 Pages Posted: 25 Oct 2012 Last revised: 8 Sep 2015

See all articles by Alain A. Krapl

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance

Thomas J. O'Brien

University of Connecticut - Department of Finance

Date Written: September 9, 2013

Abstract

To estimate foreign exchange (FX) cash flow exposure, one may choose between direct and indirect regression approaches, where the direct approach uses accounting-based cash flow data and the indirect approach uses equity returns as a cash flow proxy. The indirect approach typically includes one or more additional independent variables to control for the impact of FX changes on the required rate of return. Frequently, the control variable is an equity index. We argue that a bond return is a better control variable than an equity index. For a sample of U.S. firms, we find empirical support for this idea.

Keywords: Foreign exchange, currency, FX exposure, cash flow, control variable

JEL Classification: F23, G15

Suggested Citation

Krapl, Alain A. and O'Brien, Thomas J., Direct versus Indirect Regression Estimates of Foreign Exchange Cash Flow Exposure (September 9, 2013). International Review of Financial Analysis, Vol. 37, 2015. Available at SSRN: https://ssrn.com/abstract=2166503 or http://dx.doi.org/10.2139/ssrn.2166503

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance ( email )

Haile/US Bank College of Business
Nunn Drive
Highland Heights, KY 41099
United States

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3041 (Phone)
860-486-0634 (Fax)

HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

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