Using Survey Data to Resolve the Exchange Risk Exposure Puzzle: Evidence from U.S. Multinational Firms

32 Pages Posted: 5 Mar 2007 Last revised: 26 Aug 2009

Willem F. C. Verschoor

VU University Amsterdam, Faculty of Economics and Business Administration

Aline Muller

HEC Management School University of Liège; Maastricht University - Limburg Institute of Financial Economics (LIFE)

Ron Jongen

Dutch Central Bank (DNB)

Date Written: April 2009

Abstract

While in previous literature foreign currency exposure is estimated to be surprisingly small and insignificant, we question in this paper the rationality assumption and show that the traditional use of realized exchange rate changes to approximate unexpected currency shocks leads to a strong underestimation of the influence that exchange rates play in determining firm valuations. In light of a unique survey data base of individual exchange rate expectations, we distinguish between 'realized' and 'unexpected' foreign currency movements and find that half of our sample of 935 U.S. firms with real operations in foreign countries is significantly exposed to 'unexpected' exchange rate movements. In line with previously reported results, foreign exchange risk exposure is found to become increasingly perceptible when the return horizon is lengthened. The difference between the exposure to 'realized' versus 'unexpected' exchange rate movements is however decreasing when lengthening the horizon, suggesting that the more market participants disagree about the future path of currency values, the less investors and/or managers are likely to use the publicly available forecasts in their pricing and hedging decisions.

Keywords: foreign exchange risk, survey-based exchange rate expectations, heterogeneity, U.S. multinational firms

JEL Classification: F3, G12

Suggested Citation

Verschoor, Willem F. C. and Muller, Aline and Jongen, Ron, Using Survey Data to Resolve the Exchange Risk Exposure Puzzle: Evidence from U.S. Multinational Firms (April 2009). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=968179 or http://dx.doi.org/10.2139/ssrn.968179

Willem F. C. Verschoor

VU University Amsterdam, Faculty of Economics and Business Administration ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Aline Muller (Contact Author)

HEC Management School University of Liège ( email )

B-4000 Liege
Belgium
+3242327435 (Phone)
+3242327376 (Fax)

Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Ron Jongen

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

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