Cracks in the Crystal Ball: What Happens to Firms’ Foreign Exchange Rate Exposure When Forecasters Don't Agree About the Future

16 Pages Posted: 17 Mar 2014

See all articles by Aline Muller

Aline Muller

HEC Management School University of Liège; Maastricht University - Limburg Institute of Financial Economics (LIFE)

Julien Poncelet

University of Liege - HEC Management School

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: September 15, 2013

Abstract

The central issue of this paper is whether stock prices are exposed to total exchange rate movements -- as traditionally measured -- or to revisions in expected future exchange rate movements and unanticipated currency shocks, and by how much of each. Based on a sample of 1675 U.S. firms operating in Europe and in Japan our results reveal that disaggregating total exchange rate changes in expected and unexpected exchange rate movements leads to a more accurate and more intuitive measurement of firms' exchange rate exposure. This confirms the natural expectation that a significant proportion of multinational’s stock price movements can be explained by a revision of expectations about future exchange rate movements. Results suggest furthermore that the impact of a disaggregated exchange rate factor is stronger than the impact of previously suggested exchange rate factors.

In addition, theory expects that investors lend more credibility to forecasts communicated by expert panels when they display a low dispersion, hinting to agreement among experts, than when they display a higher dispersion. When uncertainty is higher, and when the informational content of these forecasts may be considered as less meaningful, investors should be reluctant to incorporate experts' anticipations in stock market values. Based on our time-varying estimates of the probability of agreement among experts, we find concluding empirical evidence in favor of this hypothesis.

Suggested Citation

Muller, Aline and Poncelet, Julien and Verschoor, Willem F. C. and Zwinkels, Remco C.J., Cracks in the Crystal Ball: What Happens to Firms’ Foreign Exchange Rate Exposure When Forecasters Don't Agree About the Future (September 15, 2013). Available at SSRN: https://ssrn.com/abstract=2409518 or http://dx.doi.org/10.2139/ssrn.2409518

Aline Muller

HEC Management School University of Liège ( email )

B-4000 Liege
Belgium
+3242327435 (Phone)
+3242327376 (Fax)

Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Julien Poncelet (Contact Author)

University of Liege - HEC Management School ( email )

Boulevard du Rectorat 7 (B31)
LIEGE, Liege 4000
Belgium
+3242327431 (Phone)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
30
Abstract Views
409
PlumX Metrics