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Investigating Sources of Unanticipated Exposure in Industry Stock Returns

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  • Don Bredin

    (University College Dublin)

  • Stuart Hyde

    (University of Manchester)

Abstract

This paper investigates the degree of both foreign exchange rate and interest rate exposure of industry level portfolios in the G7. Our paper draws on the efficient market hypothesis and examines the extent of unexpected foreign exchange (and interest rate) exposure rather than the standard approach of focusing purely on the change in foreign exchange (and interest rate) exposure. The results from our baseline regressions are consistent with those previously found in the literature that there is little evidence of exchange rate exposure in most markets — this is the exchange rate exposure puzzle. The second critical element of our analysis is that we investigate the sources of the exposure and examine the existence of indirect levels of both foreign exchange and interest rate exposure. The findings of exposure to foreign exchange rates and interest rates are extensive for industry sectors in the G7 economies when we take account of the possible channels of influence. Results indicate key differences between countries in terms of the relative importance of these cash flow and discount rate channels.

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File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201001.pdf
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Bibliographic Info

Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201001.

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Length: 26 pages
Date of creation: 01 Jan 2010
Date of revision:
Handle: RePEc:ucd:wpaper:201001

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Keywords: Foreign exchange; exposure; interest rates; stock returns; international finance;

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References

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Cited by:
  1. Chang, Feng-Yi & Hsin, Chin-Wen & Shiah-Hou, Shin-Rong, 2013. "A re-examination of exposure to exchange rate risk: The impact of earnings management and currency derivative usage," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3243-3257.

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