Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets
Söhnke Bartram and
Gordon Bodnar
Journal of International Money and Finance, 2012, vol. 31, issue 4, 766-792
Abstract:
This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 to 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.
Keywords: Exchange rate exposure; Exchange rate risk; Corporate finance; International finance (search for similar items in EconPapers)
JEL-codes: F3 F4 G3 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560612000198
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets (2008)
Working Paper: Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:31:y:2012:i:4:p:766-792
DOI: 10.1016/j.jimonfin.2012.01.011
Access Statistics for this article
Journal of International Money and Finance is currently edited by J. R. Lothian
More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().