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The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures

Journal of Empirical Finance, Vol. 13, Nos.4-5, pp. 519-549, October 2006

EFA 2002 Berlin Meetings Presented Paper

51 Pages Posted: 16 Mar 2002 Last revised: 11 Mar 2014

Söhnke M. Bartram

Warwick Business School - Department of Finance

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management

Date Written: August 19, 2010

Abstract

This paper examines whether the introduction of the Euro in 1999 was associated with lower stock return volatility, market risk exposures and foreign exchange rate risk exposures for 12,821 nonfinancial firms in Europe, the United States, and Japan. We show that though the Euro led to a significant decrease in the volatility of trade-weighted exchange rates of European countries, stock return variances of nonfinancial firms increased after its introduction. However, the Euro was also accompanied by significant reductions in market risk exposures for nonfinancial firms in and outside of Europe. We show that the reduction in market risk was not as a result of changes in financial leverage, and that it is concentrated in firms with a high fraction of foreign sales in Europe, a high fraction of total foreign sales and larger market capitalizations. In addition to its impact on market betas, the Euro has a positive effect on the incremental foreign exchange rate exposures, particularly for multinationals.

Keywords: Foreign exchange rates, exposure, Euro, corporate finance, risk management, derivatives

JEL Classification: G3, F4, F3

Suggested Citation

Bartram, Söhnke M. and Karolyi, George Andrew, The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures (August 19, 2010). Journal of Empirical Finance, Vol. 13, Nos.4-5, pp. 519-549, October 2006; EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=299641 or http://dx.doi.org/10.2139/ssrn.299641

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

George Andrew Karolyi (Contact Author)

Cornell University - Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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