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Exchange Rate Exposure

41 Pages Posted: 29 Aug 2007 Last revised: 23 Oct 2010

Kathryn M.E. Dominguez

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; National Bureau of Economic Research (NBER)

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2001

Abstract

In this paper we examine the relationship between exchange rate movements and firm value. We estimate the exchange rate exposure of publicly listed firms in a sample of eight (non-US) industrialized and emerging markets, and find that a significant percentage of these firms are indeed exposed. These results differ substantially from most previous studies in the literature that find little evidence of exposure. In robustness checks we find that: (i) the choice of exchange rate matters, and using the trade-weighted exchange rate is likely to understate the extent of exposure, (ii) conditioning on the value-weighted vs. the equally-weighted market index has little effect on estimated exposure, while conditioning on the international index does change the estimate of exposure, (iii) the extent of exposure is not a result of a spurious correlation between random variables with high variances, (iv) exposure increases with the return horizon, (v) within a country and within an industry, exposure coefficients are roughly evenly split between positive and negative values, (vi) averaging across the (absolute value of the) significant exposure coefficients in our sample of countries, we find an exposure coefficient of about 0.5, (vii) the extent of exposure is not sensitive to the sample period, but the set of firms that is exposed does vary over time, and (viii) the sign of the exposure coefficients changes across subperiods for about half of the firms of our sample. We find that exposure is not systematically related to firm size, industry affiliation, multinational status, foreign sales, international assets or industry-level trade.

Suggested Citation

Dominguez, Kathryn M.E. and Tesar, Linda L., Exchange Rate Exposure (September 2001). NBER Working Paper No. w8453. Available at SSRN: https://ssrn.com/abstract=281858

Kathryn M.E. Dominguez (Contact Author)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

Lorch Hall
Ann Arbor, MI 48109
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734-763-9181 (Fax)

HOME PAGE: http://www-personal.umich.edu/~kathrynd/

National Bureau of Economic Research (NBER)

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Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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