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Does hedging tell the full story? Reconciling differences in US aggregate and industry-level exchange rate risk premia

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Author Info
Francis , Bill B () (Lally School of Management, Rensselaer Polytechnic Institute)
Hasan, Iftekhar () (Rensselaer Polytechnic Institute and Bank of Finland Research)
Hunter, Delroy M () (College of Business, University of South Florida)

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Abstract

While the importance of currency movements to industry competitiveness is theoretically well established, there is little evidence that currency risk impacts US industries. Applying a conditional asset-pricing model to 36 US industries, we find that all industries have a significant currency premium that adds about 2.47 percentage points to the cost of equity and accounts for approximately 11.7% of the absolute value of total risk premia. Cross-industry variation in the currency premium is explained by foreign income, industry competitiveness, leverage, liquidity and other industry characteristics, while its time variation is explained by US aggregate foreign trade, monetary policy, growth opportunities and other macro variables. The results indicate that methodological weakness, not hedging, explains the insignificant industry currency risk premium found in previous work, thus resolving the conundrum that the currency risk premium is important at the aggregate stock market level, but not at industry level.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 14/2008.

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Length: 58 pages
Date of creation: 27 May 2008
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Handle: RePEc:hhs:bofrdp:2008_014

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Related research
Keywords: exposure; currency risk premium; cost of equity; industry competition; international asset pricing;

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Find related papers by JEL classification:
C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
F30 - International Economics - - International Finance - - - General
F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
G30 - Financial Economics - - Corporate Finance and Governance - - - General

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Cited by:
(explanations, 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.)

  1. Kinnunen, Helvi, 2008. "Government funds and demographic transition – alleviating ageing costs in a small open economy," Research Discussion Papers 21/2008, Bank of Finland. [Downloadable!]
  2. Jokivuolle, Esa & Virolainen, Kimmo & Vähämaa, Oskari, 2008. "Macro-model-based stress testing of Basel II capital requirements," Research Discussion Papers 17/2008, Bank of Finland. [Downloadable!]
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