Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

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)

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0814netti.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length: 58 pages
Date of creation: 27 May 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_014

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
More information through EDIRC

Related research

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

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Francesca Carrieri & Vihang Errunza & Sergei Sarkissian, 2004. "Industry Risk and Market Integration," Management Science, INFORMS, INFORMS, vol. 50(2), pages 207-221, February.
  2. De Santis, Giorgio & Gerard, Bruno, 1998. "How big is the premium for currency risk?," Journal of Financial Economics, Elsevier, Elsevier, vol. 49(3), pages 375-412, September.
  3. Bartov, Eli & Bodnar, Gordon M. & Kaul, Aditya, 1996. "Exchange rate variability and the riskiness of U.S. multinational firms: Evidence from the breakdown of the Bretton Woods system," Journal of Financial Economics, Elsevier, Elsevier, vol. 42(1), pages 105-132, September.
  4. Jose Campa & Linda S. Goldberg, 1993. "Investment in Manufacturing, Exchange-Rates and External Exposure," NBER Working Papers 4378, National Bureau of Economic Research, Inc.
  5. McCurdy, Thomas H & Morgan, Ieuan, 1992. "Evidence of Risk Premiums in Foreign Currency Futures Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(1), pages 65-83.
  6. John M. Griffin & Rene M. Stulz, 1997. "International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns," NBER Working Papers 6243, National Bureau of Economic Research, Inc.
  7. Goyal, Vidhan K. & Lehn, Kenneth & Racic, Stanko, 2002. "Growth opportunities and corporate debt policy: the case of the U.S. defense industry," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(1), pages 35-59, April.
  8. Westphal, Larry E, 1990. "Industrial Policy in an Export-Propelled Economy: Lessons from South Korea's Experience," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 41-59, Summer.
  9. McCurdy, Thomas H & Morgan, Ieuan G, 1991. "Tests for a Systematic Risk Component in Deviations from Uncovered Interest Rate Parity," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(3), pages 587-602, May.
  10. Allayannis, George & Ihrig, Jane, 2001. "Exposure and Markups," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(3), pages 805-35.
  11. Hentschel, Ludger & Kothari, S. P., 2001. "Are Corporations Reducing or Taking Risks with Derivatives?," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 36(01), pages 93-118, March.
  12. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  13. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  14. Jia He & Lilian K. Ng, 1998. "The Foreign Exchange Exposure of Japanese Multinational Corporations," Journal of Finance, American Finance Association, American Finance Association, vol. 53(2), pages 733-753, 04.
  15. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, American Finance Association, vol. 38(3), pages 925-84, June.
  16. Dumas, Bernard & Solnik, Bruno, 1995. " The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 445-79, June.
  17. Marston, Richard C., 2001. "The effects of industry structure on economic exposure," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(2), pages 149-164, April.
  18. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
  19. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, Elsevier, vol. 12(1), pages 29-45, February.
  20. Miller, K.D., 1993. "Industry and Country Effects on Manager's Perceptions of Environmental Uncertainties," Papers, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) 93-105, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  21. Glen, Jack & Jorion, Philippe, 1993. " Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1865-86, December.
  22. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 637-54, September.
  23. Black, Fischer, 1990. " Equilibrium Exchange Rate Hedging," Journal of Finance, American Finance Association, American Finance Association, vol. 45(3), pages 899-907, July.
  24. Guay, Wayne & Kothari, S. P, 2003. "How much do firms hedge with derivatives?," Journal of Financial Economics, Elsevier, Elsevier, vol. 70(3), pages 423-461, December.
  25. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  26. Allayannis, George & Weston, James P, 2001. "The Use of Foreign Currency Derivatives and Firm Market Value," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(1), pages 243-76.
  27. Doidge, Craig & Griffin, John & Williamson, Rohan, 2006. "Measuring the economic importance of exchange rate exposure," Journal of Empirical Finance, Elsevier, Elsevier, vol. 13(4-5), pages 550-576, October.
  28. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 111-57, March.
  29. Carrieri, Francesca & Errunza, Vihang & Majerbi, Basma, 2006. "Does Emerging Market Exchange Risk Affect Global Equity Prices?," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 41(03), pages 511-540, September.
  30. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, American Finance Association, vol. 51(2), pages 425-61, June.
  31. Murtha, Thomas P, 1991. "Surviving Industrial Targeting: State Credibility and Public Policy Contingencies in Multinational Subcontracting," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 7(1), pages 117-43, Spring.
  32. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 385-415, April.
  33. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
  34. Frankel, Jeffrey A. & Rose, Andrew K., 1995. "Empirical research on nominal exchange rates," Handbook of International Economics, Elsevier, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 33, pages 1689-1729 Elsevier.
  35. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 26(03), pages 363-376, September.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Du, Ding & Hu, Ou, 2012. "Foreign exchange volatility and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(5), pages 1202-1216.
  2. Ines Chaieb & Vihang Errunza & Basma Majerbi, 2013. "Do emerging markets provide currency diversification benefits?," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(1/2), pages 102-120.
  3. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Pricing of the currency risk in the Canadian equity market," Research in International Business and Finance, Elsevier, Elsevier, vol. 30(C), pages 173-194.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2008_014. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.