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Measuring currency exposure with quantile regression

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  • Ding Du

    ()

  • Pin Ng

    ()

  • Xiaobing Zhao

    ()

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    Abstract

    In this paper, we explore an alternative explanation of the exposure puzzle, the missing variable bias in previous studies. We propose to correct the bias with the quantile regression technique invented by Koenker and Bassett (Econometrica 46:33–51, 1978 ). Empirically, as soon as we take into account the missing variable bias as well as time variation in currency exposure, we find that 26 out of 30 or 87 % of the US industry portfolios exhibit significant currency exposure to the Major Currencies Index, and 23 out of 30 or 77 % show significant exposure to the Other Important Trading Partners Index. Our results have important theoretical and practical implications. In terms of theoretical significance, our results strengthen the findings in Francis et al. (J Financ Econ 90:169–196, 2008 ), and suggest that methodological weakness, not hedging, may explain the insignificance of currency risk in previous studies. In terms of practical significance, our results suggest a simple yet efficient approach for managers to estimate currency exposure of their firms. Copyright Springer Science+Business Media New York 2013

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 41 (2013)
    Issue (Month): 3 (October)
    Pages: 549-566

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    Handle: RePEc:kap:rqfnac:v:41:y:2013:i:3:p:549-566

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: Currency exposure; Missing variable bias; Exposure puzzle; Quantile regression; G15; F31;

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    1. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521845731.
    2. Bartram, Sohnke M., 2004. "Linear and nonlinear foreign exchange rate exposures of German nonfinancial corporations," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 673-699, June.
    3. Bartram, Söhnke M. & Bodnar, Gordon, 2005. "The Exchange Rate Exposure Puzzle," MPRA Paper 6482, University Library of Munich, Germany.
    4. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
    5. Bartram, Söhnke M. & Brown, Gregory W. & Minton, Bernadette, 2009. "Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure," MPRA Paper 14041, University Library of Munich, Germany.
    6. Bartov, Eli & Bodnar, Gordon M, 1994. " Firm Valuation, Earnings Expectations, and the Exchange-Rate Exposure Effect," Journal of Finance, American Finance Association, vol. 49(5), pages 1755-85, December.
    7. Bartram, Söhnke M., 2007. "What Lies Beneath: Foreign Exchange Rate Exposure, Hedging and Cash Flows," MPRA Paper 6661, University Library of Munich, Germany.
    8. Alan M. Taylor & Mark P. Taylor, 2004. "The Purchasing Power Parity Debate," NBER Working Papers 10607, National Bureau of Economic Research, Inc.
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    10. Patro, Dilip K. & Wald, John K. & Wu, Yangru, 2002. "Explaining exchange rate risk in world stock markets: A panel approach," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 1951-1972, October.
    11. Roger Koenker & Pin Ng, . "SparseM: A Sparse Matrix Package for R ," Journal of Statistical Software, American Statistical Association, vol. 8(i06).
    12. Bartram, Sohnke M., 2007. "Corporate cash flow and stock price exposures to foreign exchange rate risk," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 981-994, December.
    13. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    14. Chow, Edward H & Lee, Wayne Y & Solt, Michael E, 1997. "The Exchange-Rate Risk Exposure of Asset Returns," The Journal of Business, University of Chicago Press, vol. 70(1), pages 105-23, January.
    15. Aggarwal, Raj & Harper, Joel T., 2010. "Foreign exchange exposure of "domestic" corporations," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1619-1636, December.
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