Do currencies influence the stock prices of companies?

There have not been many studies examining the currency sensitivity of a truly global stock universe. This paper examines 1,691 stocks from 24 countries over the period 1996–2002. First, it shows that ‘general’ stock market indices tend to be relatively currency sensitive, with the largest effects for euro-based investors. Secondly, looking beyond general market factors, it found that only 16 per cent of the individual companies had one or more statistically significant ‘stock-specific’ currency exposures. Average exposures across companies tend to be close to zero, albeit sometimes significant. Thirdly, earlier work pointed to the existence of fundamental determinants of currency exposures. In the dataset, however, no meaningful relationships were discovered. The results suggest that most companies are currency insensitive, once one adjusts their returns for general market factors. At the same time, however, companies are in general currency sensitive, in the sense that their co-movements with general factors tend to be relatively currency sensitive. One of the practical implications is that the old question ‘Should I or shouldn't I hedge my actively managed foreign equity portfolio?’ can normally be limited to just the issue of whether to hedge the underlying passive benchmark.