The Time-Varying Diversifiability of Corporate Foreign Exchange Exposure

Abstract

Estimating co-movement measures for a large set of bilateral foreign exchange (FX) rates, I explore the relation between firm-level FX exposure and its time-varying diversifiability. For a sample of U.S. firms, the magnitude of FX exposure appears to increase during periods of low currency risk diversifiability. Additional results suggest that the introduction of the euro exacerbated the effect of diversifiability on developed market currency exposure. Moreover, the low diversifiability of emerging market currencies seems to have a stronger effect on FX exposure than the low diversifiability of developed market currencies.

Keywords: Foreign Exchange (FX) Exposure, FX Exposure Puzzle, Time-Varying FX Exposure, Diversifiability of FX Exposure

JEL Classification: G32, G39, G15, F39