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The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures

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Author Info
Bartram, Sohnke M. (Lancaster U)
Karolyi, G. Andrew (Ohio State U)

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Abstract

This paper examines whether the introduction of the Euro was associated with lower stock return volatility, market risk exposures and foreign exchange rate risk exposures for 3,921 nonfinancial firms from 18 European countries, the United States and Japan. While the Euro led to a significant decrease in the volatility of trade-weighted exchange rates of European countries, stock market volatility generally increased, but less in the Euro area and Non-Euro Europe than outside of Europe. At the same time, the Euro was accompanied by significant reductions in market risk exposures for nonfinancial firms in and outside of Europe. We show that the reduction in market risk was not the result of changes in financial leverage, and that it is concentrated in firms with a high fraction of foreign sales or assets in Europe. Moreover, the Euro led to a net absolute decrease in the foreign exchange rate exposure of nonfinancial firms. Consistent with economic theory, the changes of market and foreign exchange rate betas of multinationals are shown to be a function of firm characteristics (sales, the percentage of foreign sales in general and in Europe in particular), regional factors (geography, strength of currency) and industry characteristics (competition, traded goods).

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2005-3.

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Date of creation: Sep 2004
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Handle: RePEc:ecl:ohidic:2005-3

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F30 - International Economics - - International Finance - - - General

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  2. Gordon M. Bodnar & M.H. Franco Wong, 2000. "Estimating Exchange Rate Exposures: Some "Weighty" Issues," NBER Working Papers 7497, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  1. Bartram, Söhnke M. & Bodnar, Gordon M., 2006. "Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets," MPRA Paper 14018, University Library of Munich, Germany, revised 02 Nov 2008. [Downloadable!]
  2. Entorf & Jamin, 2005. "German Exchange Rate Exposure at DAX and Aggregate Level, International Trade, and the Role of Exchange Rate Adjustment Costs," International Finance 0508005, EconWPA. [Downloadable!]
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  3. Bartram, Söhnke M., 2007. "Corporate Cash Flow and Stock Price Exposures to Foreign Exchange Rate Risk," MPRA Paper 6662, University Library of Munich, Germany. [Downloadable!]
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  4. Shaun K. Roache & Matthew D. Merritt, 2006. "Currency Risk Premia in Global Stock Markets," IMF Working Papers 06/194, International Monetary Fund. [Downloadable!]
  5. Bartram, Sohnke & Bodnar, Gordon, 2005. "The Exchange Rate Exposure Puzzle," MPRA Paper 6482, University Library of Munich, Germany. [Downloadable!]
  6. Horst Entorf & Jochen Moebert & Katja Sonderhof, 2006. "The Foreign Exchange Rate Exposure of Nations," Darmstadt Discussion Papers in Economics 169, Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology). [Downloadable!]
  7. 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. [Downloadable!]
  8. Bartram, Söhnke M. & Burns, Natasha & Helwege, Jean, 2007. "Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions," MPRA Paper 10122, University Library of Munich, Germany, revised 21 Aug 2008. [Downloadable!]
  9. Bris, Arturo & Koskinen, Yrjö & Nilsson, Mattias, 2003. "The Euro and Corporate Valuations," Working Paper Series in Economics and Finance 525, Stockholm School of Economics, revised 06 Dec 2003. [Downloadable!]
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