Digesting FOREXS: Information Transmission across Asset Classes and Return Predictability

64 Pages Posted: 7 Jul 2020 Last revised: 9 Sep 2021

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Zhi Da

University of Notre Dame - Mendoza College of Business

Virgilio Zurita

Baylor University - Hankamer School of Business

Date Written: November 12, 2019

Abstract

We provide novel evidence that equity investors react to currency shocks with a delay. Using the cross-section of currency returns and the relative presence of U.S. firms in foreign economies, we compute a foreign operations related exchange shock (FOREXS) measure. We find FOREXS to predict firms' future cash flows and stock returns, driving much of the previously documented underreaction to foreign information. A FOREXS based long-short strategy yields a 6.74% annualized abnormal return. FOREXS predictive power comes from firms' incomplete hedging and investors' limited attention, highlighting the challenges involved when processing information from a different asset class.

Keywords: return predictability, currency information, foreign operations

JEL Classification: G12, G15

Suggested Citation

Bae, Joon Woo and Da, Zhi and Zurita, Virgilio, Digesting FOREXS: Information Transmission across Asset Classes and Return Predictability (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=3624449 or http://dx.doi.org/10.2139/ssrn.3624449

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Virgilio Zurita (Contact Author)

Baylor University - Hankamer School of Business ( email )

Waco, TX 76706
United States

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