Some Insights into the Foreign Exchange Pricing Puzzle: Evidence from a Small Open Economy
42 Pages Posted: 1 Feb 2004
One of the great puzzles of international finance research has been the surprising finding that firm value is only mildly sensitive, if at all, to exchange rate fluctuations. This runs against the conclusions of the standard net discounted cash flow theory. In this article we examine this puzzle, and provide some insights by looking at whether the result is peculiar to large economies like the US, using improved methodology including a residual regression model, the use of individual firm data, and looking at the effect of different exchange rates. We do find clear evidence that exchange rate movements affect the value of listed firms. We also find that the direction and degree of sensitivity is dependant on the currency used.
Keywords: Exchange rate risk, Asset pricing, New Zealand stock market, Small & Open economy
JEL Classification: G12
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