The Effect of Exchange Rate Fluctuations on Multinationals' Returns

24 Pages Posted: 1 Dec 2003

See all articles by Jane E. Ihrig

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

David M. Prior

affiliation not provided to SSRN

Date Written: October 2003

Abstract

This paper examines if the type of exchange rate used or size of the movement in the exchange rate matters in estimating exchange-rate exposure of U.S. nonfinancial multinationals. We find that switching from a broad trade-weighted exchange rate to a 2-digit SIC industry exchange rate increases the number of significantly exposed firms in a simple Jorion (1990) regression by 60 percent. Then separating crisis from non-crisis months we find additional evidence of exposure. Although the value of exposure does not change with the size of the exchange rate movement, we find some firms have significant exposure only in crisis periods while others have significant exposure only during normal fluctuations in exchange rates. All told, we find about 1 in 4 firms' returns is significantly affected by movement in the exchange rate between 1995 and 1999.

Keywords: exposure, crises indicators, 2-digit SIC industry exchange rate

JEL Classification: F23, F31, G12

Suggested Citation

Ihrig, Jane E. and Prior, David M., The Effect of Exchange Rate Fluctuations on Multinationals' Returns (October 2003). FRB International Finance Discussion Paper No. 782. Available at SSRN: https://ssrn.com/abstract=460600 or http://dx.doi.org/10.2139/ssrn.460600

Jane E. Ihrig (Contact Author)

Federal Reserve Board - International Financial Transactions ( email )

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David M. Prior

affiliation not provided to SSRN

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