Foreign Exchange Exposure of Exporting and Importing Firms

Posted: 30 Sep 2003

See all articles by Mahesh Pritamani

Mahesh Pritamani

Parametric Portfolio Associates

Vijay Singal

Virginia Tech

Dilip K. Shome

Virginia Polytechnic Institute & State University - Pamplin College of Business

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Abstract

The existing literature reports insignificant 'total' exposure for multinational or exporting firms, where total exposure incorporates both firm specific and macroeconomic effects. We propose a dual-effect hypothesis to explain this result which seemingly contradicts conventional wisdom. According to our proposed hypothesis, firms are affected by both the domestic economy and foreign markets. These effects are at least partially offsetting for exporters and additive for importers. The resulting predictions of insignificant total exposure for exporters and positive total exposure for importers are borne out in our tests. The literature also reports insignificant 'residual' exposure for multinationals or exporting firms, where residual exposure estimates the firm-specific exposure. This result is explained by biases in the residual exposure estimates introduced by the choice of the value-weighted market index as the control portfolio. We propose an equally weighted portfolio of purely domestic firms as an alternative portfolio to reduce such biases and report significantly negative exposure for exporters and significantly positive exposure for importers, as predicted by theory.

Keywords: Currency risk, Multinationals, Hedging, exchange rates, stock prices

JEL Classification: F23, F31

Suggested Citation

Pritamani, Mahesh and Singal, Vijay and Shome, Dilip K., Foreign Exchange Exposure of Exporting and Importing Firms. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=442920

Mahesh Pritamani

Parametric Portfolio Associates ( email )

1918 Eighth Ave
Suite 3100
Seattle, WA 98101
United States
206-381-7003 (Phone)

Vijay Singal (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States
5402317750 (Phone)

Dilip K. Shome

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-3607 (Phone)
540-231-3155 (Fax)

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