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The Exchange Rate Exposure Puzzle

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Author Info
Bartram, Sohnke
Bodnar, Gordon

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Abstract

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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File URL: http://mpra.ub.uni-muenchen.de/6482/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6482.

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Date of creation: 04 Oct 2005
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Handle: RePEc:pra:mprapa:6482

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Related research
Keywords: Exposure; risk management; derivatives; corporate finance; exchange rates;

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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

References listed on IDEAS
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Full references

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. 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!]
  2. Uluc Aysun & Melanie Guldi, 2008. "Increasing Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure," Working papers 2008-06, University of Connecticut, Department of Economics, revised Oct 2008. [Downloadable!]
  3. 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!]
  4. Uluc Aysun & Melanie Guldi, 2009. "Exchange rate exposure: A nonparametric approach," Working papers 2009-18, University of Connecticut, Department of Economics. [Downloadable!]
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