Based on basic financial models and reports in the business press, exchange rate movements are generally believed to affect the value of nonfinancial firms. In contrast, the empirical research on nonfinancial firms typically produces fewer significant exposures estimates than researchers ex-pect, independent of the sample studied and the methodology used, giving rise to a situation known as “the exposure puzzle”. This paper provides a survey of the existing research on the exposure phenomenon for nonfinancial firms. We suggest that the exposure puzzle may not be a problem of empirical methodology or sample selection as previous research has suggested, but is simply the result of the endogeneity of operative and financial hedging at the firm level. Given that empirical tests estimate exchange exposures net of corporate hedging, both, firms with low gross exposure that do not need to hedge, as well as firms with large gross exposures that employ one or several forms of hedging, may exhibit only weak exchange rate exposures net of hedging. Consequently, empirical tests yield only small percentages of firms with significant stock price exposures in almost any sample.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
6482.
Find related papers by JEL classification: F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance F3 - International Economics - - International Finance G3 - Financial Economics - - Corporate Finance and Governance
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Kathryn M. E. Dominguez & Linda L. Tesar, 2001.
"Trade and Exposure,"
American Economic Review,
American Economic Association, vol. 91(2), pages 367-370, May.
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Other versions:
Kathryn M.E. Dominguez & Linda L. Tesar, 2001.
"Trade and Exposure,"
NBER Working Papers
8129, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Kathryn M.E Dominguez & Linda L. Tesar, 2000.
"Trade and Exposure,"
Working Papers
466, Research Seminar in International Economics, University of Michigan.
[Downloadable!]