Exchange Rate Exposure at the Firm and Industry Level

125 Pages Posted: 26 Nov 2003

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Patricia H. Hall

Central Connecticut State University

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

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Previous work on the exposure of firms to exchange rate risk has primarily focused on U.S. firms and, surprisingly, found stock returns were not significantly affected by exchange-rate fluctuations. The equity market premium for exposure to currency risk was also found to be insignificant. In this paper, we examine the relation between Japanese stock returns and unanticipated exchange-rate changes for 1,079 firms traded on the Tokyo stock exchange over the 1975-1995 period. Second, we investigate whether exchange-rate risk is priced in the Japanese equity market using both unconditional and conditional multifactor asset pricing testing procedures. We find a significant relation between contemporaneous stock returns and unanticipated yen fluctuations. The exposure effect on multinationals and high-exporting firms, however, is found to be greater in comparison to low-exporting and domestic firms. Lagged-exchange rate changes on firm value are found to be statistically insignificant implying that investors are able to assess the impact of exchange-rate changes on firm value with no significant delay. The industry level analysis corroborates the cross-sectional findings for Japanese firms in that they are sensitive to contemporaneous unexpected exchange-rate fluctuations. The co-movement between stock returns and changes in the foreign value of the yen is found to be positively associated with the degree of the firm's foreign economic involvement and inversely related to its size and debt to asset ratio. Asset pricing tests show that currency risk is priced. We find corroborating evidence in support of the view that currency exposure is time varying. Our results indicate that the foreign exchange-rate risk premium is a significant component of Japanese stock returns. The combined evidence from the currency exposure and asset pricing analyses, suggests that currency risk is priced and, therefore, has implications for corporate and portfolio managers.

Suggested Citation

Doukas, John A. and Hall, Patricia H. and Lang, Hsien Ping Larry, Exchange Rate Exposure at the Firm and Industry Level. Financial Markets, Institutions & Instruments, Vol. 12, pp. 291-346, December 2003. Available at SSRN:

John A. Doukas

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)


Patricia H. Hall (Contact Author)

Central Connecticut State University ( email )

1615 Stanley Street
New Britian, CT 06050
United States
860-832-3262 (Phone)
860-832-3219 (Fax)

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

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